Genting Malaysia Bhd
(Jan 8, RM3.94)
Maintain add with a lower target price (TP) of RM5.38 from RM5.51: Genting Malaysia provided guidance on the negative impact of the goods and services tax (GST) on financial year 2015’s (FY15) earnings, which it will absorb. This proved higher than our estimate and we reflect this accordingly in our FY15 to FY16 forecasts. Also, a sizeable provision for costs associated with the failed New York casino bid will be made in the fourth quarter of FY14 (4QFY14).On a positive side, its land in Miami has appreciated strongly and approval has been given for the new gaming capacity.

Our revalued net asset value-based TP falls slightly to RM5.38 on lower FY16 earnings before interest, taxes, depreciation and amortisation (Ebitda), mitigated by revaluation surplus for Miami. Maintain “add”, with gaming capacity addition in late-2015 as a potential rerating catalyst.

Genting Malaysia participated in our Malaysia Corporate Day conference on Tuesday and met with 10 fund managers.Questions surrounded the outlook for 2015 and updates on the timeline for the various Genting Integrated Tourism Plan milestones. For the first time, Genting Malaysia provided preliminary guidance on the negative impact of the GST on its Ebitda. It estimates that FY15 Ebitda will be negatively affected by RM200 million to RM300 million which is equivalent to three to four percentage points of its Malaysian gaming Ebitda margin, which it will try to mitigate by cutting commissions to junkets.

To offset domestic day trippers potentially cutting back on gaming spending, the management will be aggressively targeting Johor, Singapore and China tourists or gamblers in 2015 given the weak ringgit.The 4QFY14 results will also see a “sizeable” provision for costs associated with the failed New York bid, although no specific guidance was given.

A big positive was that the additional gaming capacity has been approved by the government.There could be downward pressure on Genting Malaysia’s share price leading to 4QFY14 results in late February given consensus earnings downgrades to reflect the GST impact as well as uncertainty about the size of the one-off provision in 4QFY14. With the additional gaming capacity approved and on track to open by year-end, Genting Malaysia should finally see a strong rerating this year. — CIMB Investment Bank, Jan 8.

This article first appeared in The Edge Financial Daily, on January 9, 2015.