KUALA LUMPUR (Oct 13): CGS-CIMB Research sees the additional US$150 million (about RM623.85 million) injection into associate company Empire Resorts Inc (ER) as a negative development for Genting Malaysia Bhd (GenM).
“While we understand the rationale behind the exercise, we see it as a negative development for GenM as we project ER to still be loss-making over the next five years,” it said in a research report on Wednesday (Oct 13).
To recap, GenM announced on Bursa Malaysia on Tuesday that its indirectly wholly-owned unit Genting ER II LLC on Monday entered into an agreement to subscribe to up to US$150 million of additional Series L preference stock of ER.
The proceeds will be used to partly repay ER’s US$365 million short-term debt, which was earlier raised in March 2021 for working capital and debt financing.
CGS-CIMB noted that the additional US$150 million injection brings GenM's total investment in ER to US$524 million at this juncture.
“While interest cost savings will lead to narrower ER losses, we see minimal impact from this on GenM’s FY22-23F core EPS (earnings per share forecast for the financial years ending Dec 31, 2022 and Dec 31, 2023 respectively) as it will be largely offset by a higher share of ER losses (with a 66% effective stake in ER versus 58% previously) and interest cost of GenM’s own US$1 billion bond,” noted the research house.
It explained that its projections for ER's losses over the next five years factored in earnings contributions from the Resorts World Hudson Valley (RWHV) video gaming machine facility in Orange County in the US, which will be completed by the second half of 2022.
Therefore, said CGS-CIMB, the upside to ER’s earnings could come from better-than-expected gross gaming revenue for Resort World Catskills and RWHV. There is also another potential upside that could happen if ER is awarded a mobile sporting betting licence in New York as a part of the Kambi consortium. The outcome will be announced at the end of 2021, noted CGS-CIMB.
On another note, the research house reduced its FY21 net loss forecast for GenM by 9.4% to RM1.15 billion given the earlier-than-expected reopening of Resorts World Genting (RWG), with interstate travel allowed for fully vaccinated Malaysians starting from Monday. It earlier expected the opening to take place in mid-November.
CGS-CIMB lowered its target price for GenM to RM3.40 from RM3.45 earlier after factoring in its US$150 million injection into ER, which is partly buffered by the positive impact of the earlier-than-expected reopening of RWG.
“However, we keep our 'add' rating as it still yields a total return of more than 10%,” noted the research house.
At the time of writing on Wednesday, GenM was down 0.31% to RM3.18, valuing the company at RM18.7 billion.