Cover Story: Will Genting Malaysia be a big winner in the recovery play?

This article first appeared in The Edge Malaysia Weekly, on September 6, 2021 - September 12, 2021.
Cover Story: Will Genting Malaysia be a big winner in the recovery play?
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AS Malaysia inches closer to its target of fully vaccinating its adult population by October, Genting Malaysia Bhd’s (GenM) prospects are starting to look brighter.

As at Sept 2, some 65.9% of the adult population in the country had been fully vaccinated while 47.2% of the total population had been fully inoculated.

Many see GenM’s cash cow Resorts World Genting (RWG) resuming operations towards the year end, when the nation moves into Phase 4 of the National Recovery Plan. The general expectation is that the recovery in customer traffic will be quick. Interstate travellers, especially those from the Klang Valley, form an important part of the group’s visitor count.

This time, the resumption of RWG’s operations is likely to see the unveiling of its long-awaited outdoor theme park — Genting SkyWorlds — which analysts believe will help drive footfall to the hilltop integrated resort. As yet, there has been no indication of when the US$800 million theme park will be opened to the public, but the expectation is that it will be unveiled during the year end.

Maybank Investment Bank Research analyst Samuel Yin says he expects Genting SkyWorlds to open in late 2021 and believes that it will drive the growth of visitor arrivals at RWG. “GenM itself expects Genting SkyWorlds to drive RWG visitor arrivals to 30 million in the long term (our forecast is between 26 million and 27 million),” he tells The Edge.

However, Yin does not expect the theme park to be profitable so soon as depreciation alone will come in at RM300 million per annum. “Having said that, I expect Genting SkyWorlds to draw high-margin, mass-market gamblers to RWG, which is where the real money will be made,” he says.

Meanwhile, S&P Global associate director (corporate rating Asia-Pacific) Shawn Park said during a media briefing on the Genting group recently that he did not see the theme park boosting RWG’s operations materially, but it will increase the number of visitors to the resort.

“Under a normal scenario, incremental revenue [is expected] to be about RM400 million to RM500 million, with 30% Ebitda (earnings before interest, taxes, depreciation and amortisation) margin. That is around 7% to 8% of GenM’s Ebitda. So, it is not a material boost to operations, but it will increase visitors,” Park said when asked whether the new theme park would contribute significantly to the group.

Notably, the leisure and hospitality group has been one of the much-talked-about recovery stocks watched closely by investors since the Covid-19 outbreak in early 2020, causing it to temporarily close its doors to the throngs of tourists and loyal casino patrons.

While RWG has remained closed since June this year, GenM’s operations overseas have reopened and the response has been encouraging, especially in the US.

For the second quarter ended June 30 (2QFY2021), the group reported revenue of RM352.9 million and adjusted Ebitda of RM109.3 million for its US and Bahamas operations, which GenM attributed to the relaxation of Covid-19 restrictions during the period in review. It rebounded from a revenue loss of RM31.6 million and an Lbitda (loss before interest, taxes, depreciation and amortisation) of RM176.4 million in 2Q2020 due to the operations closure.

The group’s press release said the improvement in earnings was driven by the swift recovery at Resorts World Casino New York City (RWNYC), with the property achieving about the same level of gross gaming revenue in 2QFY2021 as the corresponding quarter in 2019.

In the UK and Egypt, 2QFY2021 revenue came in at RM185.3 million — five times more than 2QFY2020 — and Ebitda of RM14.3 million. The recovery in earnings was due to the reopening of Resorts World Birmingham and the group’s land-based casino in the UK since May 17 this year, which have been well received.

Meanwhile, the Malaysian operations saw revenue double to RM237.9 million in 2QFY2021 while the adjusted Lbitda improved 56% to RM94.2 million, largely due to the easing of operational restrictions at RWG and the increased interstate travel during the quarter compared with a year ago. But since June 1, it has temporarily suspended operations due to the lockdown imposed by the government.

Overall, the group’s revenue for 2QFY2021 improved to RM817.9 million — close to an eight-time increase from RM114.9 million a year ago. In tandem, its net loss was reduced to RM371 million from RM1.04 billion a year ago.

The third quarter of the year is expected to be the trough for the group before it moves into recovery, given how RWG may remain closed for the entire quarter.

“With the ongoing business closure, RWG is likely to report wider losses again in 3QFY2021. But this should be mitigated by the improved operating environment in the UK and US units,” Kenanga Research says in an Aug 27 report.

However, the research house believes that the cost rationalisation efforts, such as the 30% payroll cut and other operating expenditure rationalisation, should help drive earnings growth. Notably, its cash burn rate has reduced significantly from RM4 million a day without interest expense during the first Movement Control Order in March 2020 to about RM2.5 million a day currently.

While the short-term earnings outlook is expected to remain lacklustre, analysts believe there is light at the end of the tunnel for GenM and its long-term recovery is intact. This is provided that no new strains of Covid-19 derail the vaccination efforts.

Analysts forecast that GenM will return to profitability in FY2022, with its net profit between RM646.1 million, or earnings per share (EPS) of 11.4 sen, and RM1.16 billion, equivalent to EPS of 21 sen.

GenM’s share price has regained some lost ground following the initial shock it experienced on March 23, 2020, when the stock dived to a low of RM1.83. On Sept 3 this year, the shares closed at RM3 apiece, up 12% from RM2.67 at the start of the year, valuing the group at RM16.96 billion.

For investors looking at the recovery theme, is it time to consider GenM? Possibly so, especially if they have a long-term investment horizon in mind.

“GenM is arguably the most liquid [for trading] Covid-19 recovery play apart from AirAsia Bhd. AirAsia itself is going through a rights issue that most investors would not be keen on. So, there will be a preference for Genting Malaysia,” opines Maybank Investment Bank’s Yin.

According to Bloomberg data, 13 out of 18 analysts have a “buy” call on GenM while four recommend “hold” and one “sell”. Their consensus target price works out to RM3.56, an upside of 18.67% if the counter reaches that level.


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