KUALA LUMPUR (Aug 27): RHB Research Institute Sdn Bhd has maintained its "buy" call on Genting Malaysia Bhd (GenM) with sum-of-parts target price lowered to RM3.90 from RM4.40 previously, as the research house has imputed the estimated losses on Empire Resorts Inc.

The research house suggested that investors refocus on the fundamentals of the company's core business in Malaysia, which contributed 76% to 80% of the group's earnings before interest, taxes, depreciation, and amortisation (EBITDA) after the unwanted related party transaction incident, which is — ultimately — a non-core joint-venture asset.

"We believe the upcoming 2Q19 results (Sept 29) will continue the strong EBITDA trend from 1Q19, cushioning the impact of a tax hike.

"Recall that 1Q19 results were above Street's estimate — EBITDA grew 5% year-on-year (y-o-y) on better hold percentage, non-gaming segment growth and cost-saving initiatives. Optimism on the expected opening of the outdoor theme park in 2020 will continue to drive long-term growth," the research house said in a note today.

On the recent acquisition of Empire Resorts that caused steep correction on GenM's share price, RHB Research opined that it has severely overshot GenM's fundamentals and its value has emerged.

It said GenM currently trades at 6.6 times enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/EBITDA), with a 5.2% yield, which makes it more attractive compared to regional peers trading at 10 times with potential yield of 5%.

Meanwhile, the research house also said GenM's massive selldown has totally disregarded the asset value of a fully-built casino in Upstate New York that took about US$1 billion to build (excluding time costs and delays) along with a full-fledged licence.

"Moreover, the cost for a greenfield expansion is likely to top the acquisition costs," it added.

RHB Research believes GenM will aim to restructure Empire Resorts' debt to lower the higher debt costs (~12.2% including principal payments) and strive to achieve EBITDA neutral by FY20/21.

Notwithstanding that, the research house estimates net losses of US$71 million and US$51 million for Empire Resorts in FY20 and FY21, which slashes its earnings estimation by 9% and 6% for FY20 and FY21 respectively.