PETALING JAYA: The massive selldown in Genting counters dragged the benchmark FBM KLCI down, following news of Genting Malaysia Bhd’s (GenM) acquisition of loss-making gaming and entertainment company Empire Resorts Inc.
The index saw 7.09 points or 0.44% being struck off, ending the day at 1, 604.70. The negative view of GenM’s acquisition spilled over to its parent company, GENTING BHD, as both counters were the two top losers on the local bourse yesterday.
GenM and Genting wiped out 4.48 and 3.2 points, respectively, from the FBM KLCI.
GenM investors went on a selling spree following the announcement of the related-party transaction to acquire the New York-based Empire on Tuesday evening.
This caused GenM shares to tumble yesterday, declining 11.91% or 43 sen to RM3.18, which shaved off RM2.55bil in its market capitalisation.
It was the most actively traded stock yesterday with 256.37 million shares changing hands.
Parent company Genting slid 7.07% or 47 sen to RM6.18 with 23.64 million shares being traded.GenM announced that it was purchasing 13.2 million shares in Empire – a Nasdaq-listed company – for US$128.6mil (RM538.8mil) at US$9.74 per share from Kien Huat Realty III Ltd (KH).
The 13.2 million shares currently represent about 46% of the shares of the common stock held by KH, which also represents about 35% of the outstanding voting power of Empire on a fully diluted basis after the conversion of all preferred stocks currently outstanding into common stocks.
It had entered into a binding term sheet with KH for GenM’s wholly-owned subsidiary Genting (USA) Ltd on Aug 5.
GenM also said it is further proposing a joint venture (JV) between itself and KH to privatise Empire, of which GenUSA and KH will hold 49% and 51%, respectively.
Tan Sri Lim Kok Thay and his son Lim Keong Hui, who are major shareholders in GenM, have indirect interests in KH, which is now the largest shareholder in Empire with an 84% stake.
Affin Hwang Capital Research believes the deal might cast a negative light on GenM’s corporate governance issue again, as investors might view the deal as bailing out KH.
“Although Empire owns one of the four casino licences in upstate New York, it continues to be loss-making.
“There is a likelihood that GenM will need to inject fresh equity post the acquisition, to reduce the overall debt of US$570mil, as the interest cost alone accounts for more than 50% of the losses incurred in the first quarter of financial year 2019 (FY19), ” it said, adding that Empire’s operating cash flow was also in negative territory.
The research house has reiterated a hold call on the stock with a target price of RM3.40.
Empire owns and operates Resorts World Catskills (RWC), a casino resort situated on a 1, 700-acre site in Sullivan County, New York. It also owns and operates Monticello Casino and Raceway.Empire has also entered into a sportsbook and digital gaming collaboration agreement with an affiliate of Bet365 Group Ltd, a British online gaming company based in the United Kingdom.
GenM said Bet365 will participate with Empire in the offering of retail sports betting and online sportsbook, online casino and online poker in New York, if and when permitted by applicable law.
It added that the proposed acquisition and JV would better position the Resorts World brand in the north-eastern United States gaming market, attract additional customers from other states and also participate in Empire’s future growth opportunities in the Orange County Opportunity.
CGS-CIMB research is negative about the acquisition, mainly due to the impact of Empire’s expected losses of RM600mil annually for FY19-20F.
“GenM’s 35% stake in Empire would be equivalent to an annual RM210mil associate net loss. GenM’s FY19-20F earnings per share could fall by 14% to 15%, ” it said.
It has maintained its hold rating on the stock with a target price of RM3.50.
GenM had a net debt of RM1.8bil as of end-March 2019, or 0.1 times net gearing. CGS-CIMB said the acquisition at US$128.6mil would not strain GenM’s balance sheet, as net debt would only rise to RM2.3bil or 0.13 times net gearing.
It warned that if Empire continues recording losses over the next few years, GenM and KH might need to inject further capital.
Maybank IB Research has downgraded GenM to a hold from a buy with a target price of RM3.80, in view of the upside of less than 10%.
It said Empire’s current fundamentals were wanting, but with KH owning the larger 51% of the JV that will own Empire, it gathered that the Lim family may be more sanguine on its outlook.
RHB Research is neutral on the proposals, saying that the acquisition cost is insignificant, being only 3.5% of GenM’s market capitalisation and 4.3% of its net assets.
“While the acquisitions are not value-accretive and may negatively impact our earnings forecasts, the acquisition price appears to be fair.
“Undertaking a similar greenfield expansion of such a scale (along with a licence) would likely cost more, based on our estimates, ” it said.
The research house has maintained its buy call with a target price of RM4.40.
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