Worst seen over for Genting Malaysia

This article first appeared in The Edge Financial Daily, on January 7, 2019.
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KUALA LUMPUR: Genting Malaysia Bhd, which was highly anticipated to see an exciting year of growth in 2018 as the hilltop casino operator was poised to harvest the fruits of its Genting Integrated Tourism Plan expansion (GITP), was instead hit by a spate of negative events last year.

The group was slapped with a 10% hike in casino duty, announced it was suing 21st Century Fox and its soon-to-be new owner Walt Disney Co for over US$1 billion (RM4.14 billion) for pulling out of an agreement for an outdoor Fox World theme park at its casino resort, and posted its first net loss in a decade of RM1.49 billion for the period ended Sept 30, 2018.

The new year hasn’t started off well for the gaming group either. Yesterday, its shopping mall in Genting Highlands had a small fire from a suspected wire short-circuit, according to news reports. Luckily, no casualties were reported.

The worst, according to analysts, should be over.

“I believe there should be no more bad news ... What else can go wrong? The theme park is the last missing puzzle in the whole GITP,” TA Securities analyst Tan Kam Meng told The Edge Financial Daily over the phone.

While he believes that the additional 10% casino duty, which will start in 2019, is “excessive”, Tan said, it is unlikely the tax would be raised again this year, saying that there has never been two consecutive years of increase before. The tax was last raised more than a decade ago in 2005.

“If it so happens that the government imposes another round of gaming tax hike next year, then that will be very disruptive to earnings. But again, the chances of that happening is very low,” said Tan.

On the bright side, Genting Malaysia chairman and chief executive officer, Tan Sri Lim Kok Thay, said the theme park “remains very much part of our plans” and would be ready by early 2019, according to Singapore’s The Business Times report on Dec 16.

Though Genting Malaysia later clarified the theme park’s opening date remains up in the air as the group was considering various options for it, it stressed that the theme park remains part of the group’s growth plans.

“The opening date of the outdoor theme park is dependent on the options to be pursued by Genting Malaysia,” it said in a filing to Bursa Malaysia.

With Fox Group pulling out as the theme park operator, Tan expects visitation numbers to come in below market expectations. Nonetheless, visitor numbers are still expected to be higher, year-on-year, in 2019.

“We have had enough of all the bad news. The good news will be the management announcing it has a Plan B for the theme park. I hope they will be able to rope in another strong theme park operator or run the theme park on their own,” said Tan, adding that Genting Malaysia would just have to share their plans on the theme park with the market.

He said if Genting Malaysia manages to find a strong theme park operator, that will be a positive catalyst to share price, which reached a low of RM2.79 on Dec 14 last year — and erased over half its market value compared to when it closed at RM5.42 on the last trading day of 2017 — before paring some losses to settle at RM3.02 on Dec 31, 2018. Last Friday (Jan 4), the stock closed at RM3.04, valuing it at RM17.19 billion.

According to Bloomberg, there are 15 research houses covering the stock. Four gave it a ‘buy’, nine placed it on ‘neutral’ and two has a ‘sell’, with target prices ranging between RM2.70 and RM3.80.

Its parent, Genting Bhd, meanwhile, saw its share price fall to an eight-year low of RM5.93 on Dec 11, where it re-settled last Friday, for a market capitalisation of RM22.83 billion. In 2018, the counter lost some RM11.05 billion in market value when the stock closed at RM6.10 on the last trading day of the year, down 32% from the RM8.97 recorded on Dec 29, 2017.

Just before year-end, Genting too got entangled in a lawsuit. US-based casino operator Wynn Resorts Holdings LLC initiated a lawsuit against the group’s unit, Resorts World Las Vegas LLC, on grounds that RWLV’s Resorts World Las Vegas’ hotel and casino sported similar architectural designs to Wynn Las Vegas, Encore and Wynn Macau.

Meanwhile, Nomura’s head of Malaysia equity research, Tushar Mohata, said Genting Malaysia shares will unlikely experience further price volatility, as he is of the view that “not much can go wrong for this name from here on”.

“In 2019, the focus should return to core operations for Genting Malaysia, ie visitation and revenue growth from new projects,” said Tushar in an email, though he expects the group’s result for the first quarter ending March 31, 2019 would not be great, given the implementation of the gaming tax hike. But there might be positive surprises after that.

Also, after the steep share price correction, Tushar believes that Genting Malaysia’s management has no choice but to focus on what matters, such as delivering the Malaysia resort ramp up, and not spend more money on overseas projects with low returns.

Affin Hwang Investment Bank Bhd analyst Ng Chi Hoong concurred that there should be no more gaming tax hikes in 2019, saying Malaysia now has the second highest effective gaming tax in Asia. “The biggest challenge for Genting Malaysia is for them to continue the visitation growth, given that the outdoor theme park has now been delayed,” said Ng.

NFOs still provide attractive yields

Moving on to number forecast operators (NFOs), their outlook appears much better, despite the number of special draws being reduced by half from 21 days to 10.

TA’s Tan said the number NFOs still have a stable outlook in 2019, saying that the reduction in special draws day would only have a less than 5% impact on earnings. The sustainable dividend level of NFOs continue to make them attractive, he said.

For Berjaya Sports Toto Bhd, the dividend yield of four sen per quarter is attractive based on its current share price, Tan said, adding that it is very close to a 100% profit payout ratio.

AllianceDBS Research Cheah King Yoong, in a note dated Dec 7, said the next catalyst for NFOs will be the crackdown on illegal NFO activities. “This is because tax revenue collection would increase from higher ticket sales as punters switch back to legal NFOs and help improve the government’s fiscal position,” said Cheah.

Given that the size of illegal NFO market is about two to three times the legalised NFO market, Cheah believes there is “plenty of room” for NFOs to grow their earnings if the authority successfully reduces the illegal NFO activities.

He noted that both Berjaya Sports Toto Bhd and Magnum Bhd offer attractive sustainable yields of about 7% or more. “As such, investors could enjoy the attractive yields offered by these players while riding on this investment theme,” Cheah added.

However, while NFOs were spared from a tax hike in, they remain vulnerable to potentially higher gaming tax going forward, said Cheah, adding that the pool betting tax was last raised in 2010.

He noted that a 1% increase in gaming tax/betting duty could reduce BToto and Magnum’s forward earnings by about 7% and 8%, respectively.

“Nonetheless, we believe that the NFO sector could withstand a modest tax hike (less than 3% tax hike) without significantly dampening the sector’s earnings prospects, should the authority successfully crackdown on illegal NFO activities,” said Cheah.