01 May 2012
Genting Malaysia downgraded by RHB Research on slower progress of legalisation and hitches encountered in Genting Malaysia’s expansion plans into new geographical areas, target price RM 4.20
(GENM opening stock price yesterday (30.4.2012) was RM 3.79)
We have upgraded our forecasts by 3.6%, 1.4% and 1.2% for the financial years ending Dec 31, 2012 (FY12), FY13 and FY14 respectively, after making some adjustments for our capital expenditure (capex) assumptions based on management guidance as well as raising our earnings before interest, tax, depreciation and amortisation (EBITDA) margins assumptions for Resort World New York (RWNY) to between 22% and 23% for FY12-FY14.
While we have raised our forecasts, we have reduced our sum-of-parts based fair value to RM4.20, from RM4.35 previously. We are downgrading our recommendation on Genting Malaysia to “market perform” as we believe the slower progress of legalisation and hitches encountered in Genting Malaysia’s expansion plans into new geographical areas would cap share price movement at this juncture.
Potential catalysts that could help to re-rate the stock would be progress on the legalisation of gaming in New York and Miami, better-than-expected sustainable EBITDA margins in RWNY as well as better-than-expected and sustainable improvements in Genting UK’s operations.
Risks for the company include a slower-than-expected global and regional economic recovery, which could affect domestic sentiment and visitor arrivals; lifting of domestic subsidies for food and transportation costs, which would lower disposable income; and intensifying competition from regional players.
RWNY’s earnings have been fairly consistent, with average win per unit for year-to-date averaging US$364 per unit. Based on the disclosures given by the New York State Lottery Association, theoretically the Agent Commission of net win paid to the casino operator as compensation for operating the gaming facility is 38% of net win.
Management believes that RWNY’s EBITDA margins could improve in FY12, given the absence of pre-operating expenses. We are maintaining our win per machine projection of US$330 per day. We project RWNY to record net profits of around US$40mil to US$50mil per year, contributing 8% to 10% to Genting Malaysia’s bottomline in FY12, FY13 and FY14.