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1. Preamble

On the 11th of April 2019, I wrote an article after gathering information from Genting Malaysia's 2018 annual report and the official MOF Budget 2019 transcript. The link to my article is available below:


I concluded, from my findings, that investors could have made a mistake selling off stock that resulted in a RM5.5b wipeout of Genting Malaysia market capitalisation. The media and analysts, of course, played their part as well, portraying doom and gloom for the company.

From the numbers gathered, I hyphotesised that the rate of casino duties paid by Genting Malaysia's before the Budget 2019 announcement wasactually higher than the previous rate of 25%. And hence the increase in taxes of up to 10 percentage points to a maximum of 35% (it could fall anywhere between 25% and 35%), would have minimal impact on Genting Malaysia.

2. Latest earnings report debunks this myth

The first quarter revenue for the Malaysia operations increased 19% year-over-year from RM1.6b to RM1.9b (RM0.3b). While this is gross revenue, inclusive of gaming and non-gaming operations, it is unlikely that non-gaming operations (hotel, rental, F&B, etc) made up for 1) the shortfall in gaming revenue arising from higher Casino Duties and 2) the RM0.3b growth in Malaysian revenue.

The reason for this is simple: 80% of revenue comes from the gaming business. And if it were the non-gaming business that propped up revenue, it would have to grow at an almost impossibly high rate.

So, did the company's gaming and non-gaming business grow organically at a pace so blistering, that it was enough to not only offset the 10 percentage point increase in Casino Duties but also eke out a 19% gain?

This is unlikely (though not impossible) as well as mathematically, it would have to mean that the company grew 32% organically year-over-year (0.9/1.13=1.32).

It is therefore, more likely that the hike in Casino Duties could have fallen short of the feared 10 percentage points, falling somewhere between the 25% and 35% range indicated by MOF. It is also possible, that the hike in Casino Duties had no impact on the company, as the company already paid rates that were higher than 35% (highest in the world), as we hyphotesised.

Of course, the it could also be a combination of a lower than expected increase in Casino Duties combined with lower incentives given to high rollers. Of course a 32% organic growth in the Malaysian operations does not seem like a bad idea either.

In any case, one thing has been confirmed: Genting Malaysia overcame its recent challenges and GREW spectacularly.

3. How did the company perform in the first quarter?

Adjusted EBITDA increased 13% year-over-year to RM684m from RM608m. Two noticable exceptional items were its writing-off of RM194m to account for the termination of the Fox Theme Park deal and RM124m gain on disposal of a UK casino.

Wait a minute..didn't analysts say that EBITDA would fall RM700m?

EBITDA for the Malaysian operations was up 22% year-over-year --- despite the setbacks from a delay in the themepark and higher Casino Duties.

Genting Malaysia recorded a core net profit of RM360m --- around flat year-over-year --- better than the expectation that earnings will contract.

4. Expect a recovery in share price over time

The company's share price was RM4.91 on this day exactly a year ago. Earnings haven't changed at the core profit level. However, the share price has fallen 36% --- without truly value destroying reasons (I will address the Mashpee, Equaminity and theme part issues in due time).

As a long-term shareholder, I expect this anomaly to narrow over time (of which I have plenty --- as well as patience) and eventually surpass these historical highs.


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