M&A key catalyst for Genting


  • Business
  • Tuesday, 04 Jun 2013

Genting Bhd
By CIMB Research
Outperform
Target Price: RM11.60

AFTER adjusting for the group’s total estimated corporate social responsibility donation, first-quarter financial year 2013 (FY13) core earnings per share (EPS) accounted for 22% of our full-year forecast and 24% of consensus. The results were in line with expectations as we expect a normalisation of weak UK VIP rates.

Our EPS forecasts remain unchanged but our revised net asset value-based target price is raised after adjusting for the higher target prices of Genting Plantations (GENP) and Genting Malaysia (GENM).

Merger and acquisition is the key catalyst for the stock as its balance sheet is among the strongest relative to its gaming peers. We maintained our “outperform” call.

The 2% earnings upgrades at GENM on the back of Resorts World New York was negated by continued operating losses at the oil & gas division.

The other non-gaming units performed in line, led by the power division, which registered an adjusted earnings before interest, tax, depreciation and amortisation of RM80mil, up from RM33mil in first quarter financial year 2012 following higher dispatch rates at the Meizhou Wan power plant and construction revenue from the 660MW Banten coal-fired plant.

The main drag on the group’s first quarter 2013 was the bad VIP rates in both the UK and Singapore businesses where gross gaming revenue was down 30% year-on-year. We expect the hold rates to normalise but Singapore will remain a volatile factor given the limited breadth but high betting intensity of its VIP clientele.

GENM is the group’s long-term earnings catalyst, in our view, once its new hotel capital expenditure plans have been finalised. Inclusive of its management fees, GENM contributes 47% of group net profit.

We like Genting for its valuations. It is still trading at six times 2014 enterprise value per earnings before interest, tax, depreciation, and amortisation and is among the region’s cheapest gaming conglomerates. The group’s corporate social responsibility initiative could have been behind the recent share price fall but we believe it represents a good buying opportunity.

Guan Chong Bhd
By Hwang DBS Vickers Research
Target price: Rm1.35
Hold (downgrade)

GUAN Chong’s first-quarter financial year 2013 (FY13) net profit of RM16.5mil was way below expectations and earnings will continue to be under pressure amid a weak cocoa market.

We cut FY13 to FY15 forecast earnings by 26%-29% to factor in lower sales volume and weaker margins. We also downgrade to “fully valued” and cut target price down to RM1.35.

First-quarter FY13 net profit fell plunged 33% quarter-on-quarter (q-o-q) and 47% year-on-year (y-o-y) to RM16.5mil, accounting for just 13% of our initial full-year estimate.

The weak results were primarily due to falling selling prices (especially cocoa powder), which led to a squeeze in operating margins to 7% (compared with 12.8% in first quarter FY12, 9.1% in fourth quarter FY12).

Guan Chong declared its second interim net dividend per share of 1.5 sen, taking it to 3 sen (2% net yield) year-to-date. We expect its earnings to remain under pressure as volatility in the cocoa market is expected to persist.

The adverse industry dynamics have also affected other cocoa ingredients suppliers. Petra Food reported a net loss of USS29mil (RM89.9mil) from a net profit of USS4.6mil (RM14.3mil) in first quarter 2012) for the cocoa ingredients business while JB Foods suffered a net loss of RM1.4mil in first quarter 2013 (versus a net profit of RM12mil previously).

The challenges is set to continue as seen from JB Foods’ recent profit warning, projecting a net loss in second quarter FY13 amid depressed selling prices for cocoa powder.

Given the unfavourable outlook for the industry, we have slashed FY13-FY15F net income by 26%-29%.

Following the cut in earnings, our target price is lowered to RM1.35 (from RM1.90) after pegging a similar price-earnings of 7.5 times (1SD above its historical mean) on FY14F fully-diluted (earnings per share (of RM0.18.

The stock is expected to underperform until there is clarity on the outlook of the cocoa market. 

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