KUALA LUMPUR (Aug 22): UOB Kay Hian has upgraded Genting Malaysia Bhd (GenM) to "hold", albeit with a lower target price, after its share price fell 15% since the announcement of its unpopular related party transaction of acquiring loss-making entity Empire Resorts Inc two weeks ago.
In an update today, UOB Kay Hian's Vincent Khoo justified the upgrade on the stock to its share price falling close to its target price, which has now been lowered to RM3.01. At the time of writing, shares in GenM are down two sen or 0.65% at RM3.08 after 8.11 million shares exchanged hands.
However, Khoo likened GenM's participation in the merger to seeing mist before blue skies as he pointed out the time needed for the company to materialise growth opportunities and pessimistic financial impact that follows.
He said the acquisition of Empire is "likely to perpetuate a long-term environmental, social and governance (ESG) valuation discount on the stock".
"While GenM's rationale of participating in this merger seeks to leverage its institutional experience in the leisure and hospitality industry to enhance Empire's base-line performance and participate in Empire's future growth opportunity in the Orange County Opportunity, we assess it could take a longer time to materialise.
"GenM holding 49% of Empire through the joint venture (JV) could dilute its net profit by 8%, assuming Empire continues to make losses equivalent to about RM580 million.
"We do not rule out the possibility of further cash infusion arising from: a) Kien Huat [Realty III Ltd] converting its preferred shares in Empire to ordinary shares, which would require GenM to spend an additional US$36 million (assuming it pays the same price per share under the privatisation exercise), or/and b) a booster cash injection for Empire, which featured a huge negative EBITDA (earnings before interests, taxes, depreciation and amortisation) in 2018 and higher indebtedness (>RM2.6 billion)," he added.
UOB Kay Hian recently cut GenM's 2019 to 2020 net profit forecasts by 2.3% and 4.6% respectively, bringing cumulative cuts to 5.2% and 19%.
To recap, GenM via Genting (USA) Ltd (GenUSA) recently entered into a binding agreement to buy a 46% stake in Empire, which owns Catskills Casino in Upstate New York from its holding company Kien Huat for US$128.6 million or RM537.8 million.
Subsequently, both entities formed a JV called Hercules Topco LLC with GenM, via GenUSA, holding a 49% stake.
The JV is formed to resolve Empire's current liquidity issue via privatisation and restructuring efforts. Empire's earlier filing with the US Securities and Exchange Commission said that if it cannot secure financing to bail it out, it may have to take the bankruptcy route.
Nonetheless, GenM defends that the investment is deemed a "worthwhile investment".