Thursday 28 Mar 2024
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KUALA LUMPUR (March 20): Hong Leong Investment Bank (HLIB) has cut its target price (TP) on Genting Malaysia Bhd (GENM) to RM2.31, from RM3.13 previously, on the back of lower earnings forecasts.

In a note to investors this morning, the research house — which has also upgraded its call on the counter to “buy” from “hold” — said it would be cutting its earnings forecasts for the financial year ended Dec 31, 2020 (FY2020) by 35.1% as it expects lower numbers of Resorts World Genting (RWG) visitors and contributions from foreign casinos to reflect the stronger impact of the outbreak. 

“Upgrade to ‘buy’ at RM1.91 with a lower TP of RM2.31 (from RM3.13) after updating the forecast changes while imputing a lower EV/Ebitda multiple of 5.5x (-2SD below 10-year mean) towards mid-FY21 Ebitda,” the research house said.

It noted that its sum-of-parts (SOP) derived TP includes a 20% discount to reflect the uncertainty over the duration of the Covid-19 outbreak.

As such, it believes its mid-FY21 valuation is a fairer timeline yardstick to use as GENM’s FY20 numbers on their own would undervalue its longer-term positive outlook with the outdoor theme park launch being a catalyst, while rolling over to FY21 would be neglecting the near-term impact of the outbreak.

HLIB added that despite its conservative estimates and large TP cut, it felt that the year to date (YTD) share price fall of 42% suffered by GenM has somewhat priced in the impact of Covid-19 and offers some buffer to bottom nibble.

“Share price may potentially remain subdued in the near term but the attractive dividend yield of 9.4% and positive longer-term prospects should hopefully serve as downside support to the share price,” the research house opined.

On its outdoor theme park, HLIB viewed that the targeted launch of the facility in the third quarter of this year will serve as a huge draw factor, combined with pent-up demand if Covid-19 is contained by then.

From a cash flow perspective, HLIB believes that GENM should be able to continue declaring a divided of some 18 sen per share, as the decline in operating cash flow will be offset by an approximately RM1 billion decrease in capital expenditure (capex), given that construction of the site is at its tail-end.

The research house is neutral on GENM’s equity injection into Empire Resorts Inc of US$40 million or RM174.8 million, as this amount is rather small relative to its balance sheet position.

“Our pro-forma calculation implies that net gearing would only inch up to 0.2x (from 0.19x as of 4Q19) after the transaction. We are not entirely surprised by this news as Empire had previously disclosed the need for capital injection alongside and/or restructuring of debt (which is currently ongoing),” HLIB said.

As of 9:28am, shares in GENM were trading 4.19% or eight sen higher at RM1.99, valuing it at some RM11.82 billion.

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