PETALING JAYA: Genting Malaysia Bhd was one of the top losers on the local bourse yesterday as the casino operator’s share price tumbled after it announced plans to buy Genting Singapore PLC’s operations in Britain (Genting UK) on Thursday.
Genting Malaysia fell 12 sen or 4.38% to close at a one-month low of RM2.62 with 83 million shares traded. The stock slumped as much as 10% – the most in almost nine years – to an intra-day low of RM2.46 in the morning.
The proposed acquisition has prompted downgrades from some brokerages which viewed the investment as pricey for a risky market, provides little growth catalyst and may require more capital injection in future.
Affin Investment Bank highlighted several key reasons why there might be a negative reaction to the deal.
First, it said the acquisition was pricey. The acquisition cost of £340mil values the transaction at 11.2 times financial year ending Dec 31, 2011 (FY11) enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) which was at a 76% premium to Genting UK’s larger peer Rank Group PLC, which was currently trading at 6.3 times FY11 EV/EBITDA.
Therefore, this may result in further impairments at Genting Malaysia level.
Second, there is a high probability of further capital injection as Genting UK may be at a heavy capex stage.
While short-term knee-jerk reaction to the above RPT proposal is expected, Affin sees some longer-term silver linings.
“Genting Malaysia is buying the casino assets at probably the trough of Britain’s and the EU’s economic conditions. If we take a three to five-year view, the British economy may rebound, lifting asset prices.
“The pound may also rebound when the financial markets and economy improve,” it said.
Affin added that there was also a potentially minimal downside to gaming regulatory risk in Britain as the current tax structure was already at the hefty 50% tax bracket.
HwangDBS Research Sdn Bhd expects the market to frown upon another related party transaction as Genting Malaysia’s previous RM250mil acquisition of Walker Digital Gaming from Genting group chairman Tan Sri Lim Kok Thay saw Genting Malaysia’s and GENTING BHD’s share prices tumble some 30%.
It sees the acquisition as negative for Genting Malaysia due to the regulatory risk, nascent economic recovery and intense competition in the British market.
Accordingly, Genting Singapore has to-date written down 59% of its £699mil investment.
HwangDBS also sees minimal synergy from the British operations.
“It is also an inefficient use of resources (net cash will drop to RM2.2bil from RM5.2bil). Genting Malaysia may be better off investing in strong growth potential markets or return capital to shareholders.
“Although the Genting UK acquisition will be earnings accretive – boosting Genting Malaysia’s earnings before interest, taxation, depreciation and amortisation by 10% – return on investment is estimated at a meager 5%,” it noted.
However, HwangDBS said the disposal of Genting UK was positive for Genting Singapore as this would enable it to focus on the Singaporean gaming business.
The disposal would also reduce pressure on Genting Singapore’s balance sheet and enable it to explore integrated resort projects in other jurisdictions, it added.
TA Securities views the Genting UK transaction as a negative one as it does not foresee a growth catalyst. “Genting Malaysia would need capital expenditure of around £20mil to £30mil a year refurbishing the old and rather dingy looking casinos to attract a younger and more vibrant crowd.
“Although the book value may look cheap, we are negative on our outlook,” it said.
Nevertheless, TA is maintaining a hold on Genting Malaysia with no changes to its earnings estimates.
Kenanga Research, however, is maintaining a buy call on Genting Malaysia. “With RM3.6bil left, the group will actively continue to evaluate business opportunities.
“While we believe the share price may react negatively to the proposed acquisition, the fundamental valuation remains intact,” it noted.
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