GENM remains good buy despite RM625 mil fund injection into Empire Resorts

WHILE it is sensible for Genting Malaysia Bhd (GENM) to inject another US$150 mil (RM625 mil) into its US-based gaming unit Empire Resorts Inc (ER), the move is seen as a negative development given ER is projected to remain loss-making over the next five years.

And even though the interest cost savings will lead to narrower ER losses, CGS-CIMB Research expects minimal impact from this on GENM’s FY2022-2023F core earnings per share (EPS) as it will be largely offset by higher share of ER losses (66% effective stake in ER vs 58% previously) and interest cost on GENM’s own US$1 bil bond.

Yesterday (Oct 13), GENM announced that it will subscribe for up to US$150 mil of ER’s preference shares (Series L), bringing its total investment in ER to US$524 mil (RM2.2 bil or 39 sen per GENM share) to date.

Funded via proceeds from GENM’s US$1 bil bond issuance in mid-April, the fund injection will be used to partly repay ER’s US$365 mil of short-term debt which was raised in March for working capital and debt refinancing.

GenM indirectly owns 49% of common stock in Empire through its indirect wholly-owned subsidiary Genting ER Ltd.

“We trim GENM’s target (to RM3.40 from RM3.45 previously) after factoring in its US$150 mil ER equity injection, partly buffered by the positive impact from the earlier-than-expected reopening of Resorts World Genting,” justified analysts Foong Choong Chen and Sherman Lam Hsien Jin in a company update.

“However, we keep our ‘add’ rating as it still yields a total return of >10% (including FY2022F yield of 4.6%).”

Meanwhile, UOB Kay Hian Research deemed the fund injection exercise as not surprising given that Empire’s operations have been disrupted by COVID-19.

“We do not anticipate Empire needing further cash infusion, having received cash infusion totalling US$524.4 mil from GENM since Aug 2019 and having refinanced its loftily high interest bearing bonds,” projected analysts Vincent Khoo and Jack Goh.

“With Resorts World Genting (RWG) having re-opened and interstate travels now allowed in Malaysia, we believe that this equity injection into Empire will have minimal impact on investor sentiment.”

The research house contended that it continues to like GENM as a direct proxy to the re-opening theme with potential strong earnings recovery from 4Q 2021 onwards.

“The announcement of Genting SkyWorlds opening (an outdoor theme park) in the near term, restoration of dividends, pent-up demand from domestic trippers and resilient recovery of US’ premises also serve as strong catalysts,” added UOB Kay Hian Research.

The research house maintained a “buy” rating on GENM with a target price of RM3.40 while believing that “GENM promises compelling upside in the longer term with potential target price of about RM4 if we roll over to 2022 with mean valuations”.

At the close of today’s mid-day trading, GENM was up 1 sen or 0.31% to RM3.20 with 6.08 million shares traded, thus valuing the company at RM19 bil. – Oct 13, 2021

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