Last Friday, Macquarie Equities Research (MQ Research) released a report (28 Feb) on gaming and entertainment company Genting Malaysia (GENM). MQ Research said that GENM’s underlying trends continued to improve throughout 2019 with a rebound incoming in the second half of 2020, supported by the theme park opening.
In a scenario where fears ease and a pandemic does not fuel a global recession, MQ Research believes GENM shares will be among the greatest outperformers. An Outperform rating is maintained on GENM, with a target price of RM3.70.
Trends Improved Before Getting Worse
Amid a global market sell-off where travel/leisure stocks have been hit particularly hard, GENM’s 4Q results demonstrated continued improvements after a particularly difficult start to 2019. While MQ Research expects the near-term focus to remain on a soft 1Q20, with management highlighting double-digit visitation declines at Resorts World Genting (RWG), MQ Research also found comfort in management commentary regarding a quick rebound in demand after the SARS epidemic.
In a scenario where fears ease, and a pandemic does not fuel a global recession, MQ Research believes GENM shares will be among the greatest outperformers. Gaming demand typically rebounds quickly to visitation displacements, and pent up demand often accentuates rebounds. A potential 2H20 rebound would also come alongside the opening of the theme park (still 3Q expected opening) which MQ Research sees further reaccelerating earnings in 2021 and beyond.
Dissecting 4Q Results
Malaysia. Luck adj. earnings before interest, tax, depreciation and amortization (EBITDA) (the most important metric in gaming) steadily improved throughout 2019, where 4Q declined 8% YoY vs 3Q -18% as GENM stabilized from the gross gaming revenue (GGR) tax hike. This came alongside continued growth in non-gaming (+34% in 4Q) and further improvements in GGR. MQ Research estimate 4Q GGR declined low single digits year-on-year (YoY) on a luck adj. basis vs high single digit declines in 2Q/3Q. RWG supported revenue improvements without sacrificing the cost structure, where luck adj. margins increased 1ppt quarter-on-quarter (QoQ).
New York City. New York City (NYC) GGR accelerated to +5% YoY vs +3Q in 2Q/3Q, while Resorts World Casino NYC (RWNYC) expanded margins QoQ despite flattish QoQ revs. January GGR has accelerated to +7.5%, as the property continues to accelerate revenues even ahead of the $400m expansion at the end of 2020.
Catskills. During its seasonally softest quarter, Catskills EBITDA was just slightly negative (-US$3m) vs -$15m in 4Q18. Property GGR continues to ramp, with January +24% YoY vs +27% in 4Q. Looking into 2020, MQ Research expects EBITDA to ramp alongside operating leverage and incremental cost synergies. During 1Q results, MQ Research also expects an update to management’s synergy targets, where MQ Research sees over $20m total synergies vs the $10m already achieved.
Earnings and Target Price Revision
MQ Research reduces its 2020 forecasts significantly while tweaking 2021-22 to reflect accounting adjustments from the Empire acquisition.
Price Catalyst
12-month price target: RM3.70 based on a EV/EBITDA methodology.
Catalyst: 1Q results.
Action and Recommendation
Maintain Outperform rating, reduce target price to RM3.70 from RM3.75.
12-month Target Price Methodology
GENM MK: RM3.70 based on a EV/EBITDA methodology
Source: Macquarie Research - 2 Mar 2020
https://klse.i3investor.com/blogs/kltrader/2020-03-02-story-h1484658222-Genting_Malaysia_ndash_in_for_a_Rebound.jsp
