PETALING JAYA: The casino segment in the country has been downgraded in view of the Genting group of companies' more than 20% year-to-date (ytd) stellar gains in share prices.
UOB Kay Hian on Wednesday said it was downgrading the casino segment to market weight following Genting Malaysia’s (GENM) and Genting Bhd
’s (GENT) share prices having appreciated 31% and 25% ytd respectively.
Towards this end, the research house has downgraded GENT to hold with a marginally higher target price of RM10.50 (previously RM10.45) as current valuations have factored in the near-term prospects of GENM’s Genting Integrated Tourism Plan (GITP) project as well as Genting Singapore’s (GENS) Japan greenfield opportunity, lower bad debt provision and cost-cutting initiatives.
It downgraded GENM to sell despite the brokerage’s marginally higher target price of RM5.15 (previously RM5.10).
GENM now trades at +2 standard deviation (SD) enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) on investors’ lofty earnings expectations from the partial rollout of GITP facilities.
However, it added that risks are clearly ignored, including a delayed full roll-out and higher cost at GITP, and the potential impairment of its US$250mil investments in tribal casino in Massachusetts, US.
Meanwhile, the research house said based on its assessment, the successful opening of Sky Casino mass market gaming area in end-Mar 2017 (raising table count net capacity by about 20%) will only boost gaming revenue moderately, taking into account Sky Casino’s cannibalisation of the older gaming areas, although it expect Sky Casino to gain further traction in the coming months.
While GENT trades at a more reasonable mean EV/EBITDA after the run-up, room for further appreciation is limited for now, given the lack of direct catalysts, it noted.
Like GENM, it said investors may again impute impairment risk on GENT’s US$112mil investment in Tau Rx.
“While we gather that GENM’s approved number of gaming tables has increased 35-40% and slot machines by 70%-80% with the opening of Sky Casino, gaming revenue would not increase proportionally.
“Our view takes into account that future gaming revenue growth will be largely driven by the mass-market segment (although Sky Casino has dedicated a VIP section scheduled to open in Sep 17), while growth in the VIP segment would be more measured.
“In the absence of theme-park contribution and with the retail mall occupancy still ramping up, Malaysia operation’s EBITDA is estimated to rise by only 11% y-o-y in 2017.
“For 2018, we have factored in a 28% increment from 2016’s EBITDA to RM2.5bil. Overall, while we continue to expect a sharp growth earnings trajectory through to 2019, we expect GITP to command only a moderate internal rate of return," the research outfit said.
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