Is GENM (4715) GENTING MALAYSIA BERHAD a gem now at RM3?
Genm (4715) #GENM
Is Genm a gem now at RM3?
To answer to this, lets have a look at the 4 main impactful event below:
1) 2019 budget - a) licence fee increase from RM120mil to RM150mil per annum. b) Casino duties increase up to 35%. c) Slot machine licence increase from RM10k to RM50k per annum.
2) Impairment loss in Tribe promissory notes - 1.83bil impairment loss is incurred as investment in promissory notes issued by Mashpee Wampanoag Tribe to build a gaming resort under trust does not satisfy the condition of Indian Reorganisation act.
3) Purchase of Empire Resort - Purchased Empire Resort (a US listed company) that is operating in loss from Kien Huat Realty at USD9.74 per share.
4) Coronavirus Outbreak - Outbreak of virus causes lockdown in China and reduced tourist.
Lets discuss on the impact of the event.
1) As seen from the annual report (screenshot attached), we can identify that 68% of the revenue for genm come from Malaysia and 79% of the revenue belongs to gaming operations. With this, we know that out of 9.74bil revenue, 5.2bil is derived from Malaysia Casino. Hence we can know for sure that the budget will have a negative impact on genm. As of 11 feb 2020; 3 quarter result for 2019 has been released and as seen from the latest 2 quarter result, PAT is maintained at 400mil per quarter which we should really commend the management team for doing a great job in maintaining the margin. Besides that, it is quite clear that the management is also focusing on improving the non-gaming revenue as it increases 18% in the latest annual report.
2) Whether or not this 1.83bil which is already impaired in 2018 is able to be recovered is solely depends on the ongoing legal case to allow the land in trust to develop a casino and Tribe ability to repay the promissory note from the cash flow when it is operational.
3) Shareholder did not like this Empire Resort purchase as genm share price drop from 3.9 to 3.03 after the announcement of this purchase. However, if we look at the chart (screenshot attached), genm actually purchase it at a 66% discount as the highest point in 2018 is USD29. Moreover, looking at financial data, Empire Resort revenue is increasing and net loss is narrowing (screenshot attached). So, my question to all shareholder, isn't it everyone's dream to buy a stock at low/ undervalued price? Not to forget genm have present in the US and this purchase might help to strengthen their present in US and maybe achieve a synergy effect in the medium to long term. Yet, it is still important to monitor this purchase as the net loss will still have an impact in genm quarter report in the short term.
4) If we want to look at the impact of virus outbreak, we have to study the similar cases of SARS back in 2003. A brief history about SARS; SARS first case is identified in November 2002 and in Jan 2003 there is a super spreader where it worsen the situation; and the peak of the disease is in April. Everything is under control during summer which is around May and many expert is expect the same to happen in May 2020. in 2003, as we can see from the graph (screenshot attached), genm share price drop 60% from highest point and recover in a year time. With China announce of lockdown in 2020, it is expected that at least 2 quarter of genm result will be adversely impacted. Here is 2 pic taken from genting on the ground on 8th Feb 2020. Can see that the crowd is quite normal and casino is operating normally. It is a Malaysia public holiday that day, so a normal crowd is not sufficient to help in genm earnings. With China lockdown and virus outbreak, it is also good to gather some data on genting tourist. From the 3 quarter data in the attached picture (source: https://www.pahangtourism.org.my/…/file/107-tourist-arrival…), can see that 70% of tourist comes from Malaysia while 20% comes from China and Singapore (both is impacted by this virus outbreak). Although number of China and Singapore tourist consist of 20%, but believe that their purchasing power will impact genm earning up to 30%. Management discussion in annual report also state that there are 73% of tourist that belongs to day trippers. Genm share price is at RM3.36 before the virus outbreak, hence with 30% impact in earnings, it is expected that genm will bottomed out at RM2.35 in the worst case. Some will suggest a 60% drop in share price as per 2003, but do note that at RM3 now, genm is already 50% discount from peak of RM6.
Above are the events that is impacting genm and cause the price to be depressed. Nonetheless, to see if genm is a gem at current price we need to further consider 2 things:
1) Whether genm is able to continue to pay such dividend
2) Catalyst - Outdoor theme-park that is much anticipated
1) At current price, genm is paying a dividend yield of 6% which attract many dividend investor. I would say if dividend is able to sustain at 6%, buying genm now to replace FD is ok as our OPR is reduced to 2.75% and genm share price has already dropped 50%. A simple study in excel as screenshot in picture, we can see that from 2016 to 2018, genm has been paying a special dividend total to 23.3 sen, this is because genm disposed GenHk to Golden Hope Ltd for RM1.71bil cash in 2016 which is around 29 sen per share. Hence, the most genm can give in special dividend from GenHk disposal going forward is 5 sen. Lets look at normal DPS now. DPS seems to be increasing from 6.3sen in 2015 to 11 sen in 2018. Looking at the cash flow from operating minus investing cash flow, we can easily say that the dividend of 6% is not able to sustain as the amount is lesser than dividend payout (include special dividend). However, to project a DPS amount, by taking latest annual report operating minus investing cash flow, we can obtain a RM789mil cash flow for dividend and divide by 5.9bil outstanding share the figure is 13sen. So, i forecast the dividend this year will be in the range of 10-14 sen. Taking the middle which is 12sen/ by RM3 per share, the dividend yield of genm for the coming years is estimated to be at 4%.
2) After resolving the court case with fox, outdoor theme-park is expected to start operating in 3rd quarter 2020. Project the above Pahang tourist data to a full year, estimate that there is 8mil tourist coming to genting in a year. If 45% of tourist buy a ticket to the theme-park and taking Universal Studio Singapore price as guideline which is RM200 per ticket; it is expected to bring in a revenue of RM700mil. Based on the segment report of non-gaming revenue discussed above, this will be a 35% increase in non-gaming revenue in overall and 50% increase in Malaysia. Operator of theme-park usually will also sell souvenir to maximized earnings which will be another revenue source for genm. Not to forget, there is a ripple effect once the theme-park is able to attract more tourist to the hilltop; some tourist will also gamble and indirectly increase the gaming revenue.
Conclusion: It is ok to buy genm at RM3 as the share price had dropped 50% and dividend yield is 4%. Besides that, Coronavirus issue is only a temporary weakness for genm that will go away in no time. However, it is important to prepare to average down as no one can accurately predict the lowest point of a stock. A little to add on, the average PE of genm is 15 and now is 10 which show sign of undervalue. If EPS is maintained at 28sen (7sen per quarter) * PE of 15, the fair value of genm will be at RM4.2.
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