Genting and Resorts grapple with uncertainty


  • Business
  • Saturday, 12 Apr 2003

BY RUBIN KHOO

IT'S been a volatile ride for Resorts World Bhd and its parent company, Genting Bhd, at least where their share prices are concerned. 

At a time when concerns of weak economic growth are compounded by the Iraq war, earnings are now threatened by the outbreak of the Severe Acute Respiratory Syndrome (SARS) virus. The uncertainty that now plagues so many companies is thus also taking its toll on Resorts World.  

“The outlook depends on how long the outbreak will last,” says one analyst with a foreign house.  

The impact will be felt in a number of ways. Firstly, a possible decline in foreign arrivals, a decline in domestic arrivals and a fall in occupancy rate. But how big the impact will be nobody knows. 

The Malaysian government has already stopped issuing visas to tourists from China, a move that will undoubtedly affect earnings estimates for Resorts World and Genting.  

Expectations are that Resorts will be doubly hit as its 34 per cent-owned associate Star Cruises Ltd, which covers Hong Kong, Singapore and Hanoi routes, see a drop in load factor while casino and occupancy rates at Genting Highlands are also bound to be affected with Singaporeans now accounting for 25 per cent of room sales and those from Hong Kong and China making up 11 per cent.  

As Genting currently derives approximately 75 per cent of its net profit from Resorts World, its financial performance will depend quite a bit on the latter. Last week, the shares of both companies tumbled. On April 4, Resorts World closed at RM8.25 while Genting RM12.40.  

But as if to re-affirm that this was not an accurate reflection of the group's financial position, earlier this week Genting purchased shares of Resorts World through the open market thereby increasing its stake in its subsidiary by 1 per cent to 56.17 per cent.  

While no details were provided regarding the average price paid, it is estimated to have cost the company roughly RM90 million based on Monday's closing price of RM8.35.  

“In the long-term, it is a good move,” says one analyst. “The outbreak will probably blow over in the next couple of months.” 

In its report, one foreign house regards the acquisition as an indication of the limited downside of Resorts World share at its present levels. The report also adds that it does not expect the outbreak to be prolonged beyond mid-2003.  

“The pricing has factored in quite a lot of decline,” concurs another analyst. 

But while industry observers believe that the share price has touched rock bottom, they are quick to add that much of their projections depends on how long the epidemic lasts.  

And that is anybody's guess at this point. However, while the share price may have factored in a “worst-case” scenario, it does not eliminate possibilities of further downward revisions.  

“Things could change from here on if countries manage to contain it,” says an analyst.  

“The worst case is already reflected in the share price. But if the outbreak becomes worse, the shares could possibly fall further.”  

Nonetheless, some analysts feel that present values are a result of an over-reaction that it isn’t a fair reflection of the company’s financial standing.  

According to a recent report by a local research house, Resorts World’s revenue grew by high single digits in the first quarter of financial year 2003. This period, which saw the Chinese New Year festival and Singapore school holidays coincide, was a super-peak season for the group.  

Another local research house writes that while the proportion of tourists from China would drop, the impact on the current financial year will be minimal as this is not a seasonally peak period. A downside bias, however, still exists but the extent will depend on the severity of SARS. 

Assuming no growth in Resorts World's earnings, price earnings ratio (PER) for the current financial year is at 13.6x, which is still at a discount to its historical average PER of 25x 

And while the Iraq war may have deterred foreign travel, domestic tourism has yet to be affected. Estimates are that locals comprise 84 per cent of total visitors (including both day trippers and hotel guests) to Genting Highlands.  

As at the end of last week, sources say, there has been no observable decline in local tourist arrivals despite greater reporting of the SARS virus of late.  

Occupancy rates too remain stable at approximately 74 per cent, up by roughly 10 per cent compared to the same period last year. 

But the SARS virus only began to be widely reported in March and the next couple of months may be crucial. 

This also means that there is a strong possibility that things could turn around. Ironically, the Genting group is used to dealing with a reactionary market.  

And in the past, it has been able to withstand adverse circumstances. The Bali bombing in October last year also sent the share prices of Resorts World and Genting spiralling down on fears that tourism in the region would fall.  

“Traditionally, these companies have been known to come out of things quite well,” says an analyst.  

“During 9/11 and the Bali bombings, they don't seem to have suffered. There was a decline but they recovered.”  

But the Ministry of Culture, Arts and Tourism has already stated that the SARS outbreak has inflicted more harm on the tourism sector than that of the 9-11 attacks, the Bali bombing or the war in Iraq. Business in hotels and airlines, reports state, have dropped between 30 and 40 per cent this month.  

Furthermore, Resorts World carries an added burden through its exposure to Star Cruises. 

“Our concern is that the cruise will continue its normal itinerary at a loss, which will be difficult to recover in subsequent months,” says an analyst. 

“But if you maintain a bullish view on Genting Highlands, there are still nine months to go and the casino has a lot of capacity. So there is a possibility of recovering losses but this will depend on how the economy goes. If the economy is doing well, it would mean that people would be able to take more breaks.” 

However, prospects of economic growth look dim at the moment with a weaker than expected gross domestic product outlook for the country. But others feel the impact of this will be minimal. 

“I don't think this will affect the group's earnings,” says an analyst. “I am pretty sure of a sharp recovery once the uncertainty of the outbreak is solved 

But in the meantime, the uncertainty is what the group has to grapple with. Most research houses have based their estimate on the assumption that outbreak is contained within the next couple of months.  

But as one analyst puts it, “it's already been a month.” Another adds that it took local health authorities eight months to deal with the Nipah virus.  

“The jury is still out on what the impact is going to be on these companies,” he says. 

Some analysts are therefore more optimistic on Genting rather than Resorts World. While much of its revenue is derived from Resorts World, it is a diversified group.  

It is currently also involved in plantations via Asiatic Development Bhd, oil and gas investments in China, Australia, Myanmar and Indonesia and power by way of a 39.1 per cent stake in Genting Sanyen Power Sdn Bhd.  

In its last financial year, the non-resort operations contributed 24 per cent. 

“Genting is a more diversified group compared to Resorts World,” says an analyst.  

“It will derive revenue from other businesses which generate strong cashflows and are fairly stable.” 

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