ALLIANCEDBS Research has upgraded Genting Malaysia Bhd (GenM) to a buy but at a lower target price of RM2.40 with analyst Cheah King Yoong noting the local gaming player has its negatives priced in.
“Although we believe that FY20 is undoubtedly a challenging year for the group given the
Covid-19 pandemic concerns, we believe that this is only temporary in nature and its operations will start picking up from 2HFY20,” said Cheah, adding that the stock has also dropped about 40% on a year-to-date basis, which he believes has priced in the negatives and remarks that the selling is overdone.
This indicates emerging value, according to Cheah, and he advocates investors with a longer-term investment horizon to take advantage of the current price weakness of GenM to accumulate the stock.
This factors in lower earnings forecasts for GenM’s 2020 and 2021 financial years, which Cheah notes are below consensus to consider a conservative stance in lower revenue assumptions.
The lower earnings forecasts also consider the expectation for discretionary spending to be moderate in the second half of 2020, even after pandemic concerns have subsided. However, the moderate discretionary spending is expected to cap the topline growth of GenM, marking 2020 as a challenging year for the group.
Potential catalysts to GenM’s earnings forecast, according to Cheah, include higher-than-expected visitor numbers following subsiding Covid-19 pandemic concerns along with stronger-than-expected returns from the group’s Genting Integrated Tourism Plan (GITP) investment.
This includes the news that GenM’s outdoor theme park remains on track to be opened in the third quarter of 2020, despite the implementation of the Movement Control Order (MCO).
“We believe that the opening of the outdoor theme park will boost the visitations to Genting Highlands, which could sustain its growth prospects in the second half of its 2020 financial year,” said Cheah.
However, the potential risks include weaker-than-expected foreign visitors to Genting Highlands due to prolonged pandemic concerns and higher gaming taxes, which could further dampen GenM’s earnings prospects.
“Post-earnings revisions, we lowered our sum-of-parts-based target price for the group to RM2.40, upon rolling forward our valuation base to FY21. Our target price indicates an implied FY21 price-to-earnings (PE) ratio of 14x,” said Cheah.
At 4.38pm, GenM’s shares were last done at RM1.95, down two sen, with 9.7 million shares traded. — March 30, 2020
