This article first appeared in The Edge Financial Daily on November 9, 2018

Genting Malaysia Bhd
(Nov 8, RM3.60)
Maintain hold with an unchanged target price (TP) of RM3.95: Genting Malaysia Bhd made a clarification on the casino duties and casino licence fee that were announced in Budget 2019.

It said it has been advised by the finance ministry that: i) the casino duties will be revised up to 35%, which represent a 10 percentage point (ppt) increase over existing duty rates; and ii) the annual casino licence fee will be revised from RM120 million to RM150 million. The amendments will take effect on Jan 1, 2019. (Source: Bursa Malaysia)

Although the clarification seems to imply that both the VIP and mass market segments are subject to the 10ppt hike, both the VIP and mass market segments could still be subject to 35% gaming duties. Our assessment takes note that the Genting group’s past announcements and communications have consistently referred to only the mass market gaming duty rate, and the Budget 2019 speech had made reference to only a single rate of 35%. While we continue to hope for a reasonable gaming duty regime (we continue to seek clarification on this matter), we conservatively maintain our earnings forecasts and worst-case assumption that both the VIP and mass market segments are subject to 35% gaming duties. In addition, due to the steep increment in gaming duties, we have factored in an aggressive annual RM200 million cost cut (about 3% of total cost for Malaysia operations) in 2019-2020 to defend its margins. In the announcement, Genting Malaysia said it will review its marketing expense and cost structure to mitigate the impact of the tax hike.

In the scenario of a 10 ppt hike for both the VIP and mass market segments, our the TPs for Genting Malaysia and Genting Bhd are RM5 and RM8.30 respectively.

Maintain “hold” and a TP of RM3.95. Current valuation at 11.6 times financial year 2019 forecast enterprise value to earnings before interest, taxes, depreciation and amortisation has largely priced in the gaming duties hike. Any share price weakness is a buying opportunity. We have a “buy” call on its parent company, Genting Bhd, with a TP of RM7.90. While the catalyst for Genting Malaysia’s opening of Fox Theme Park is now partially offset by the casino duties hike, Japan’s greenfield integrated resort opportunity (via subsidiary Genting Singapore) remains a key catalyst. — UOB Kay Hian, Nov 8