Analysts consider re-rating Resorts


BY KATHY FONG

RESORTS World Bhd share price has surged more than 28% or RM2.15 from its recent low of RM7.55 posted in April when many were dumping the shares amid worries over the impact of Severe Acute Respiratory Syndrome (SARS) outbreak on the company's earnings. 

The recovery of the share price is a good evidence of the dissipation of the SARS fears. World Health Organisation had lifted the travel restriction on several affected countries.  

And it said on Thursday that the number of SARS cases in the region had dwindled in recent weeks. 

However, the strong surge in Resorts World is putting analysts in a difficult situation. They are now thinking hard whether to re-rate the stock, which is nearing the fair value that they have pegged earlier. 

“Given the ample liquidity in the market, Resorts World share price may overshoot my target price at RM10. The movement of the share price is very dictated by sentiment,'' said an analyst. 

More importantly, there is growing optimism on the macro-economic outlook domestically and globally. 

Analysts will tweak their earnings forecast should economists revise their forecast on GDP growth. 

Certain analysts believe that there may be some upside surprise on the company's earnings when the number of visitors recovers.. 

The second-quarter earnings are widely expected to be lousy due to the SARS outbreak. 

An analyst from TA Securities noted that the share price had not factored in the full impact of the recovery from SARS. 

The analyst, who has a “long-term buy” call on the counter, does not recommend investors to take profit now. 

Analysts said that investors were looking beyond the particular quarter affected by the outbreak of SARS.  

“One should not rule out the possibility that earnings in the second half of the year may be able to make up for the early loss,'' said a research manager from a Singapore-based stockbroking firm. 

She also stressed that the fundamentals of the company had never collapsed because of the SARS outbreak. And Resorts World already has its expansion plan in place to capture further growth in tourist arrivals. 

The sharp price rise of the stock is seen to be driven by the recent inflow of foreign funds, given that gaming is one of the two sectors that has the highest weighting on the Morgan Stanley Capital In- ternational (MSCI) indices. 

Banking is another sector that carries heavyweight on MSCI indices. 

For money managers who want to benchmark against the MSCI indices will need to have gaming stocks in their portfolio. 

In fact, the KLSE is the only stock market in the Asia Pacific (excluding Australia) that has casino operator and number forecast operators listed on the exchange. 

This also explains why gaming stocks are popular among foreign fund managers. 

Furthermore, the heavyweight blue chips are rather pricey even before the start of the rally on the KLSE. 

Hence, the foreign fund managers are left with limited choice of large capitalisation companies. 

“There is only a handful of stocks that the foreign fund managers will be looking for their exposure to the Malaysian market. 

“The valuations of the heavyweights are expensive. So gaming and banking are the first two sectors they are looking at, other than the heavyweight component stocks,'' said a senior analyst at a foreign stockbroking firm. 

The three heavyweight blue chips Telekom Malaysia Bhd, Tenaga Nasional Bhd and Malayan Banking Bhd are currently trading the price-earning ratio (P/E) between 17 and 21 times. 

Resorts World, the only listed casino operator in the region, is currently trading at P/E ratio of about 13 times based on forecast earnings for the next financial year, compared with a historical of high teens. 

Nonetheless, its valuation would be demanding based on earnings per share (EPS) of 50.10 sen for the current financial year ending Dec 31, 2003.  

Analysts have slashed their forecast for the year, taking into account the sharp drop in arrivals to the hilltop casino and fewer people taking holidays on cruise liners.  

The valuation of its parent company Genting Bhd is even more appealing at P/E ratio of 14 times based on EPS of 103.50 sen for the current year and 11 times for the next financial year earnings.  

Genting, which holds 56.8% stake in Resorts World, is considered as a cheaper entry to the casino operator.  

Apart from the solid fundamentals, Resorts World shares have higher free float than many companies on the KLSE. This is an important criterion that foreign fund managers would consider when making investment decision.  

Resort World has outstanding shares of 1.09 billion at par value of 50 sen each. 

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