AllianceDBS Research has reiterated its buy recommendation on Genting Bhd (GENT) with a lower target price of RM5.55 as it provides cheaper exposure to both its subsidiaries, Genting Singapore (GENS) and Genting Malaysia (GENM).
AllianceDBS analyst Cheah King Yoong said, “As the parent company of GENS and GENM, it continues to offer deep value. Furthermore, the stock has dropped more than 30% on a year to date (YTD) basis, which we believe has priced in the negatives.”
The stock is trading at a forward price-to-book ratio (P/BV) of 0.4x, which is significantly below its 1998 and 2009 crisis lows of 0.9x and 0.8x, respectively.
Although FY20 is undoubtedly a challenging year for the group given the Covid-19 pandemic outbreak, the research house expects operations to pick up from 2HFY20.
The outdoor theme park remains on track to commence operations in 3QFY20, despite the implementation of the movement control order (MCO). Its opening will boost the visitor numbers to Genting Highland, which could sustain its growth prospects in 2HFY20.
Other segments will be adversely affected by slowing economic activities. Other than GENS and GENM, GENT also owns Genting Plantation (GENP) and other non-listed businesses such as power and oil & gas units. In the power business, the group has substantial interests in coal-fired, gas fired and wind power plants in Indonesia, China and India.
For its oil and gas business, GENT has 100% participating interest in the Kasuri Production Sharing Contract in West Papua, Indonesia. It also has 49% working interest in the exploration, development and production of petroleum in the Chengdaoxi block in China.
“Although we believe that these operations are likely to be adversely impacted by the slowing economic activities and collapse in oil price, we wish to highlight that the earnings contributions of these unlisted entities to the group remain small. In FY19, these unlisted entities contributed less than 10% to the group’s earnings,” says Cheah.
AllianceDBS cut its FY20/21F earnings estimates by 39%/18%, mainly to reflect the combined effects of lowering the earnings estimates of GENS and GENM, reducing the earnings contributions from its unlisted entity, particularly the oil and gas and power segments, and bookkeeping purposes.
“We believe that our earnings estimates for FY20/21 are rather conservative, now 26%/13% below consensus,” added Cheah.
GENT’s management highlighted that the construction of Resorts World Las Vegas (RWLV) is progressing well. It is expecting the casino and resort to commence operations by the summer of 2021. The total investment cost for the project is US$4.3 bil (about RM18 bil) where the group has spent US$1.9 bil as at end Dec 2019.
The group is expected to incur about RM5 bil capital expenditure (capex) per annum for 2020 and 2021 to complete the project.
To recap, in 2013, GENT ventured directly instead of going through its subsidiaries into the gaming space in the US when it acquired a 32.2ha site at the north end of the Las Vegas Strip from Boyd Gaming Corporation. The success of this venture, the group’s first direct involvement in the US gaming sector, could change the group’s earnings profile.
GENT is a diversified conglomerate with businesses encompassing gaming, power generation, plantations, oil & gas and property development. The group holds substantial stakes in listed subsidiaries and an associate – Genting Malaysia (GENM – 50%), Genting Singapore (GENS – 53%), Genting Plantations (GENP – 55%) and Landmarks (30%).
The group derives its earnings largely from GENS and GENM, contributing more than 85% of the group’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) in 2019.
GENS operates Resorts World Sentosa (RWS) which is one of Singapore’s top tourist attractions. While tourist arrivals are likely to plummet in 1H2020 due to extensive travel restrictions amid the Covid-19 outbreak, AllianceDBS expects pent-up travel demand to swiftly materialise and underpin a sharp turnaround from 3Q2020 to pre-outbreak levels over 4Q2020-1Q20201, and a marginal 2-3% decline in 2021 from 2019’s level.
GENM has gaming operations spanning Malaysia, the UK and the US. The Malaysian operation is its key income contributor accounting for about 80% of GENM’s EBITDA in 2019. The group has progressively launched Sky Avenue and Sky Plaza shopping malls since end-2016. Genting Malaysia soft launched the Genting Highlands Premium Outlets in mid-June 2017.
The group also opened all levels at the Sky Casino in 3Q17. The indoor Skytropolis theme park commenced operations in December 2018. GENM’s legal settlement with Twenty First Century Fox Inc and Walt Disney Co could also speed up the opening of its delayed outdoor theme park to 2HFY20. The group management is comfortable that the outdoor theme park will be on track to be opened by 3QFY20.
GENT is at a slight net debt as at end-Dec 2019. Although the group needs to increase its capital spending going forward to develop RWLV in 2020 and 2021, AllianceDBS expects its net gearing position to be healthy about 0.1-0.2x.
A hard landing in China would present downside risk to AllianceDBS’ earnings estimates as a large proportion of GENS’ VIP customers originate from China and this may impact the ability of GENS’ Chinese customers to gamble at its properties.
Further weakening of consumer sentiment, particularly due to the Covid-19 pandemic, could hurt its gaming operations as well.
Other risks include the possibility of gaming tax hikes in Malaysia and/or Singapore that will have an adverse impact on the earnings prospects of GENM and GENS.
Continued weakness in crude palm oil (CPO) prices may lead to lower-than-expected plantation earnings while lower energy prices would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in the US dollar would affect the profitability of planters in general.
There are also higher operating risks in Las Vegas, no thanks to the intense competition in a mature market, the absence of first-mover advantages for GENT, and its less strategic location. Nevertheless, GENT can leverage on its large Asian VIP clientele and experience with Foxwoods Resort Casino. – April 28, 2020
