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The temporary closure of its casino operations globally is expected to dent earnings severely as reflected in its share price which has been bashed down 40% YTD. Having said that, trading below -2.5SD is cheap and the view that COVID-19 will not last, we believe the sell-down is excessive. Thus, we upgrade the stock to OUTPERFORM albeit with a lower target price of RM2.50.

Closed for COVID-19. Following government’s extension of the Movement Control Order (MCO) to combat the COVID-19 pandemic, GENM announced yesterday that all its Malaysia operation will be temporarily closed for another two weeks until 14 April. In addition, Resorts World Birmingham and other land-based casinos in the UK are also temporarily closed. This renders all its land-based operations around the world closed except Crockfords Cairo in Egypt which is still open for business. Earlier, it already announced the temporary closure of Resorts World Casino New Year City, Resorts World Catskill and Resorts World Bimini.

Cut FY20 estimates by 39%. Following our previous 29% cut in earnings in end-Feb as we expected a slowdown in 1HCY20 before recovering in 2HCY20, we cut FY20 earnings estimate by another 39% as the MCO, which restricted non-essential services to conduct business for four weeks, is seriously denting its business. Even if the MCO is removed after 14 Apr, business activities may not revert to normal for the next six months and this may defer the opening of the long-awaited outdoor theme park planned for 3QCY20 again. As such, we have assumed business to only return to normal in 4QCY20. For overseas operations, we expect a similar business environment as Malaysia and see higher losses from Empire as opposed to management’s earlier expectation of positive EBITDA. We also slashed FY21 estimates by 11% on cascading effect from FY20.

Stock plunged 40% YTD. We decided to switch to PBV from SoP to value the stock as the current depressed business condition is making earnings forecasts dicey. Before the start of the lockdown of Wuhan in end-Feb, GENM was hovering above the RM3.10-level but declined rapidly soon after to as low as a 52-week low of RM1.83, 53% from its 52-week high of RM3.86 in Jul last year. This priced the stock at 0.59x PBV which is below -2.5SD PBV 5-year mean of 0.64x which we believe is very attractive. At current environment, we will place -2SD as the fair value level for casino operators while the ideal buying zone should be at -3SD. This valuation is one notch lower than NFO players as casino players face higher earnings risk and the current sell-down has demonstrated this scenario.

Sell-down overdone; upgrade to OUTPERFORM. With this new valuation matrix, we cut our target price to RM2.50, which is based on 0.79x PBV or -2SD PBV 5-year mean from SoP-driven target price of RM2.95. In our view, its risk-reward looks fairly attractive after a severe 40% YTD sell-down and a target valuation that is based on -2SD is fairly conservative as the COVID-19 will not last. As such, we upgrade the stock to OUTPERFORM from MARKET PERFORM. On the other hand, given current volatility, the stock may decline further to -3SD level of RM1.55 which could be an ideal entry point. Risk to our upgraded call is a prolonged COVID-19 pandemic which will continue to restrict travelling that affect casino patronages

Source: Kenanga Research - 27 Mar 2020

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