KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its “Overweight” rating on casino operators in Malaysia, with Genting Bhd as the top pick due to the possibility of a special dividend in conjunction with the group’s 50th anniversary this year.
In its report, UOB Kay Hian Research said on Wednesday Malaysian listed casino operators continued to appeal to investors due to their cheap valuations, relative earnings resilience and promising growth opportunities.
It highlighted Genting, which would likely to declare a special dividend to investors amid the group’s anniversary celebrations in 2015.
UOB Kay Hian Research, however, downgraded its target price for the counter to RM10.50 from RM10.90 previously but maintaining a “Buy”.
As for for Genting Malaysia Bhd (GenM), its target price remained at RM4.76, with a “Buy” rating.
“Our target price revision (for Genting) imputed an expected downward revision of our EBITDA (earnings before interest, tax, depreciation and amortisation) estimate of 7%-8% in 2015 on Genting Singapore (GenS).
“In addition, Genting will also be impacted by subsidiary GenS’ fair value losses on derivative products in the second quarter of 2015, which is a non-core item,” it explained.
UOB Kay Hian Research said Malaysian casino operators were currently trading at compelling valuations, with Genting trading at seven times the estimated 2016 enterprise value (EV)/Ebitda and Genting at nine times its forecast EV/EBITDA.
“Our preference for Genting reflects plenty of visible developments,” it said.
These developments included a possible 50th anniversary special dividend; expected stability of mainland Chinese VIP patronage and Japan potentially legalising casino by year-end, which would benefit GenS; Genting Malaysia’s crowd-pulling transformation and expansion activities in Malaysia; and the planned opening of the US$4bil (RM16.13bil) Resort World Las Vegas in the United States.
“We also like Genting Malaysia, which should steadily re-rate from the second half of 2015 to 2016, underpinned by the ramping up of celebratory and gaming activities in conjunction with the Genting group’s 50th anniversary celebrations, and the opening of the 20th Century Fox theme park,” UOB Kay Hian Research said.
According to the research house, both Genting and Genting Malaysia do not share GenS’ investor concerns over heavy investment in structured products for non-hedging purposes due to the duo’s little or no direct exposure in structured product investment.
“Unlike the case of GenS, which issued a profit warning last week due to fair value loss on derivative financial instruments and unrealised foreign exchange translation losses, Genting and Genting Malaysia’s 2014 balance sheets do not reveal material direct exposure to structured investment products,” UOB Kay Hian Research explained.
Genting Malaysia’s financial assets were mainly quoted foreign equity investments and Malaysia income funds.
As for Genting, on top of carrying GenS’ RM3.5bil-equivalent of compound financial instruments and RM658mil current liabilities of derivative financial instruments, it also had RM281mil of long-term liabilities of derivative financial instruments, which were presumably used for hedging.
Other big-ticket items under Genting’s available-for-sale financial assets were mainly equity investments in foreign corporations.
Despite the optimistic outlook on the sector, UOB Kay Hian Research said casino operators were expected to register uninspiring results for the second quarter of 2015.
“While we understand that gaming volumes in Malaysia have sustained at low single-digit growth, and the Bimini casino in US is trimming its start-up losses, GenM’s EBITDA is expected to contract as it fully absorbed GST cost,” UOBKayHian explained.
“We estimate GST absorption will have impact of RM60mil to RM65mil per quarter to EBITDA,” it said, adding that its forecast had factored in the GST absorption.