Optimism on Genting Group Continues

The Genting group of companies, one of Malaysia’s most cash-rich conglomerates, begins its current financial year with a dent in its bottom line.

The first quarter of financial year 2019 (1Q19) has been unfavourable to the group, as its three listed entities in Malaysia and one in Singapore all registered lower net profits on the back of a slew of operational headwinds.

Cumulatively, the four listed companies, namely Genting BhdGenting Malaysia BhdGenting Plantations Bhd and Singapore-listed Genting Singapore Ltd lost almost RM226mil in earnings for the January to March 2019 period, on a year-on-year (y-o-y) comparison.

A major provision of RM198.3mil for the now-defunct 21st Century Fox-branded outdoor theme park, a decline in Resorts World Sentosa’s gaming business and weaker palm products selling prices were among the key factors that dragged down the conglomerate’s total earnings in the first quarter.

Parent company Genting Bhd’s earnings dropped by 6.8% y-o-y or RM41.06mil to RM561.65mil in the first quarter, even as its top line in 1Q19 rose 6.09% y-o-y to RM5.57bil.

Meanwhile, the earnings of Genting Malaysia, which is 49.5% owned by Genting Bhd, took a sharp dive as it fell by 25.1% y-o-y or RM89.95mil to RM268.29mil in 1Q19.

The lower profit was mainly due to the RM198.3mil provision made on the Fox-branded theme park and the declining volume of business in the company’s gaming segment as a result of lower incentives offered to customers.

Its revenue jumped 14.2% y-o-y to RM2.74bil in 1Q19 from RM2.4bil a year ago.

Genting Bhd’s 51.3%-owned Genting Plantations saw its net profit in the three-month period slashed by more than half as it fell by RM59.29mil to RM41.68mil. In comparison, the company posted a net profit of RM100.98mil in 1Q18.

However, Genting Plantations’ revenue for the first quarter increased by 18% y-o-y to RM621.7mil, underpinned by the higher offtake of biodiesel and refined palm products from the downstream manufacturing segment along with higher sales volume from the plantation segment.

Across the Causeway, the earnings of Genting Singapore fell by S$11.72mil (RM35.61mil) or 5% y-o-y to S$205.47mil in 1Q19, with the revenue reduced by 5% to S$640.36mil.

Its gaming business in Resorts World Sentosa was hit by an 8% y-o-y drop in revenue, although this was partially offset by higher revenue from non-gaming business. Genting Bhd has an equity stake of 52.7% in Genting Singapore.

Challenges surrounding the Genting group of companies are expected to continue, considering the punitively high casino tax and increased casino licence fees in Malaysia effective 2019, delay of the theme park launch as well as the weak plantation sector outlook, among others.

However, despite the headwinds, analysts have continued to be overwhelmingly positive on the group, particularly Genting Bhd and Genting Malaysia.

Based on Bloomberg, 12 out of 16 polled analysts have “buy” calls on Genting Bhd, while 10 out of 20 analysts have recommended “buy” on Genting Malaysia.

As for Genting Plantations, five research houses have issued a “buy” call on the company, aside from 10 “hold” calls and four “sell” calls.

Commenting on the Genting Bhd’s financial performance in 1Q19, Affin Hwang Capital Research analyst Ng Chi Hoong says that there are “no negative surprises”.

“Genting Bhd’s 1Q19 core-net profit of RM591.6mil (-2% y-o-y) was above our expectation but within consensus, achieving 28% and 24% of respective forecast.

“We have lowered our earnings per share forecast for 2019-2021 by 3.4%-16.3%, to factor in the performance of its subsidiaries.

“We are reaffirming our buy call on Genting Bhd despite lowering our target price to RM9.85 (from RM11.00), as we roll forward our valuation base to 2020,” says Ng in a note, adding that the company’s valuation remains attractive.

Bloomberg figures show that Genting Bhd’s price-to-earnings ratio stands at 18.24 times, with a price-to-book (P/B) ratio of 0.72 times.

As a general rule of thumb, any P/B value under 1 times is considered attractive, indicating a potentially undervalued stock.

The group also delivers a decent 12-month dividend yield of 3.38%.

AllianceDBS Research analyst Cheah King Yoong has also revised Genting Bhd’s earnings forecasts downwards for the financial years of 2019 and 2020 by 2% and 5% respectively.

“We trim our FY19/20 earnings estimates by -2%/-5%, mainly to reflect the combined effects of lowering the earnings estimates of Genting Singapore and Genting Plantations, partly mitigated by raising the earnings estimates of Genting Malaysia.

“We believe that Genting Bhd continues to offer deep value. As the parent company of Genting Singapore and Genting Malaysia, Genting Bhd provides a cheaper exposure to both its subsidiaries,” says Cheah.

In the near term, Genting Bhd’s core gaming operations remain as the management’s key concern.

The increasing competition from regional casinos, particularly in the premium mass-market segment, and the worsening US-China trade spat are expected to negatively affect gaming volume in the VIP segment, moving forward.

For context, the impact of these factors on Genting Bhd’s overall gaming volume for the VIP segment had already been felt in 1Q19, which dragged down the earnings.

While these challenges pose significant headwinds on the group’s outlook, analysts believe it could be mitigated by the conglomerate’s expansion plans.

The development of the US$4bil Resort World Las Vegas is currently on track and is expected to commence operations by end-2020.

AllianceDBS Research points out that the success of this venture – the group’s first direct involvement in the US gaming business- could change Genting Bhd’s earnings profile.

Meanwhile, Genting Singapore will be investing S$4.5bil over the next five years to add more attractions at Universal Studios, provide 1,100 new hotel rooms, potentially expand its gaming floor as well as enhance its convention and F&B offering.

“This should provide a medium-term boost Genting Singapore’s earnings,” stated AllianceDBS Research.

As for Genting Plantations, the going is expected to get tough.

The current deprived crude palm oil (CPO) price environment, despite growth in fresh fruit bunch production, is expected to continue to affect the company’s profitability.

Source: The Star

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