Genting Malaysia Bhd
(Sept 29, RM4.17)
Upgrade to “buy” with target price of RM5.15: The poor second quarter of financial year 2014 (2Q14) earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM460.4 million (-37% year-on-year, -24% quarter-on-quarter) was due to low VIP win rates at Resorts World Genting (RWG) and Genting UK.

We estimate that 2QFY14 group Ebitda would have been about RM665 million or 45% higher on normalised VIP win rates at RWG and Genting UK. Therefore, we believe that investors should not be overly concerned. We trim our FY14/15/16 earnings estimates by 6%/6%/4% nonetheless to account for lower visitor arrivals to RWG in FY14 and a longer break-even period for Resorts World Bimini.

On another note, we are increasingly convinced that Genting Malaysia will win a prized upstate New York commercial casino licence as it is offering the (i) highest contribution of investments into the project, (ii) largest amount of licensing fees and/or highest tax rates, and (iii) greatest number of jobs and salaries. Despite committing to investing more and paying more licensing fees, we estimate that an upstate New York licence will accrete at least a net 47 sen per share. Winners will be announced by November 2014 at the latest.

We now add the aforementioned 47 sen per share to our existing sum-of-parts valuation (SOTP) based on target price of RM4.70 to derive a sky blue target price of RM5.15 to reflect our optimism that Genting Malaysia will win at least one upstate New York commercial casino licence.

In the unlikely event that Genting Malaysia does not win a single licence, our base case SOTP-based target price of RM4.70 still offers a 13% upside. Upgrade Genting Malaysia to “buy” from hold. — Maybank IB Research, Sept 29

This article first appeared in The Edge Financial Daily, on September 30, 2014.