Genting hopes for equanimity

THE Genting group of companies has been grabbing the headlines since end-2018. The recent development involves the purchase of the controversial “Equanimity” superyacht by Genting Malaysia Bhd. The firm has proposed to buy the superyacht, which was formerly owned by fugitive businessman Jho Low, at a price tag of US$126mil (RM515mil).

The market didn’t take the news very well, culminating in more than RM4bil being wiped off the cumulative market value of the three Genting companies listed in Malaysia and Singapore.

Meanwhile, analysts are mixed on the half-a-billion-ringgit purchase, despite Genting Malaysia buying the superyacht at a 51% discount to its previous owner’s purchase price.

It is worth noting that Genting Malaysia is sitting on a massive cash pile of close to RM8bil, which means the company would be able to finance the acquisition of the superyacht from its coffers.

Despite the strong cash position, the sentiment on the Genting stocks has been on the decline since last year, because investors are concerned about the challenging outlook for the group.

It started with the tabling of Budget 2019, where casino duties were revised upward to 35%, which is a 10% increase, effective Jan 1.

A month after the budget was tabled, Walt Disney and 21st Century Fox decided to abandon the contract to build the first Fox-branded theme park in Genting Highlands on the grounds of default.

The new theme park based on the 20th Century Fox World design was supposed to boost the number of visitors to the Genting Highlands resort for the next two years from June 2019.

Without the Fox theme park, there are also concerns on the prospects of the other food and beverage and consumer outlets that have tenanted space in Genting Highlands on the anticipated arrival of the theme park.

The question now is how will Genting fill the void left by the Fox theme park.

Genting Malaysia has said that development plans and options for the outdoor theme park were being reviewed amid ongoing legal proceedings. The company is suing Walt Disney and 21st Century Fox for more than US$1bil.

Shares in Genting Malaysia have been on a decline since last year by about 31% year-on-year (y-o-y) to RM3.19 apiece. It fell into the red in financial year 2018 (FY18), posting RM19.6mil in losses compared with a RM1.2bil profit a year earlier.The losses were mainly due to impairment on the group’s investment in the promissory notes issued by the native American tribe for the development of an integrated gaming resort in the United States on a piece of tribal land.

During the year, Genting Malaysia recorded an impairment loss of RM1.83bil relating to the group’s total investment (including accrued interest) in the promissory notes issued by the Mashpee Wampanoag tribe.

Parent company Genting Bhd, meanwhile, recorded a decline in profit in FY18, while its share price has dropped more than 21% y-o-y.

Maintenance of Equanimity

CIMB Research is targeting the monthly maintenance cost for the superyacht to be about RM2mil or RM24mil per year.

“We estimate Genting Malaysia’s annual net interest expense, depreciation and maintenance costs could rise by about RM75.7mil,” it says in a report.

As such, the research house expects Genting Malaysia’s FY19-FY21 earnings per share to fall by 3.4%-5% if the company fails to generate any revenue contribution from Equanimity.

CIMB has raised concerns on Genting Malaysia’s earnings, as the latter does not have experience in managing superyachts and cruise liners.

Genting Malaysia said in a filing with Bursa Malaysia that the acquisition would allow the company to differentiate itself from its competitors, apart from providing Genting Malaysia with a unique and competitive edge for its premium customer business.

On a positive note, RHB Research says that the superyacht will differentiate Genting Malaysia from competitors with a unique edge for its high-roller gaming unit.

The research house expects that Genting Malaysia to see a lower cost of maintaining the superyacht.

“We are of the view that the maintenance cost of the yacht and cruise operation will be manageable, and could be lower than the cost incurred by the government (RM5mil-RM6mil per quarter), given Genting’s expertise in luxury cruise operations,” it says in a note.

The main question is how much Genting can garner from Equanimity and what firm will do if it fails to open the Fox theme park this year.

RHB Research and CIMB Research say the re-rating catalyst for Genting Malaysia is the opening of the new outdoor theme park in 2019 and a positive earnings contribution from Equanimity, while the de-rating catalysts are the new theme park failing to open in 2019 and losses from Equanimity.