Virus outbreak a temporary setback for Genting group

  • Corporate News Premium
  • Saturday, 01 Feb 2020

In its recent report, CGS-CIMB Research points out that GenM’s Resorts World Genting (RWG) will likely be negatively impacted by lower gaming, hotel and theme park revenues if the Wuhan coronavirus outbreak became a global pandemic.

The rapid spread of a deadly new virus from Wuhan, China, has dashed expectations of an earlier-than-scheduled opening of the new outdoor theme park by Genting Malaysia Bhd (GenM).

Prior to the novel coronavirus outbreak, some analysts had expected that the hotel and casino operator would bring forward the soft launch of the highly anticipated theme park in Genting Highlands to some time in the second quarter of this year, instead of waiting until the third quarter of 2020 as the company had announced earlier on.

Such expectation was based on the belief that the move would enable the group to capture the increase in tourist arrivals amid the ongoing Visit Malaysia Year 2020 (VMY 2020) campaign; and this could have been a major catalyst for GenM’s shares.

But with the new global health emergency denting consumer sentiment and potentially, tourist arrivals, some analysts now peg their expectations on GenM opening the new outdoor theme park towards the latter part of the third quarter of the year.

“By summer, this new coronavirus outbreak (which spreads more easily in cold weather, and less so in hot weather) will likely subside or end, ” an analyst with a local brokerage explains.

“So, we expect the recovery in tourist arrivals to gradually take place only after that, ” he adds.

As in the case of the outbreak of severe acute respiratory syndrome (SARS) from November 2002 to July 2003, some medical researchers have said the novel coronavirus outbreak could last for at least “several months”.

“Hence, it makes no sense for GenM to open the new theme park so soon as long as this plague remains tourist arrivals are dropping, especially with so many China cities now in a travel lockdown, and Malaysia imposing a temporary ban on tourists from Wuhan, and people in general preferring to stay home amid the epidemic, ” another analyst says.

“This deals a temporary setback for the company.

“It doesn’t look good if the turnout is poor at the opening; so, we expect the company to wait until the situation eases, ” he points out, adding that a prolonged coronavirus outbreak will have a material negative impact on the Genting group in general.

The analyst notes the current virus outbreak is also expected to exacerbate the ongoing cyclical slowdown in global economic activity, and this could also weigh on the group’s prospects.

Earnings impact

In its recent report, CGS-CIMB Research points out that GenM’s Resorts World Genting (RWG) will likely be negatively impacted by lower gaming, hotel and theme park revenues if the Wuhan coronavirus outbreak became a global pandemic.

“Foreign visitors, which made up around 20% of total arrivals at the highland resort in the financial year ended Dec 31,2018, will likely fall substantially as holiday travels slow, which was observed during the previous SARS and H1N1 outbreaks in 2003 and 2009, respectively, ” the brokerage says.

It adds that GenM’s sister company, Genting Singapore Ltd (GenS), will also be negatively impacted, as the hospitality and integrated resorts development group could suffer a substantial drop in visitor arrivals to its Resorts World Sentosa in Singapore in the event of a pandemic. Their parent company GENTING BHD will also be impacted by virtue of its 49.5% stake in GenM and 52.7% stake in GenS.

“Nevertheless, due to the more diversified nature of its businesses, Genting would be slightly less impacted, in our view, ” CGS-CIMB Research says.

It notes GenM and GenS collectively accounted for 69% of Genting’s revenue and 81% of earnings for the nine months ended September 2019.

According to analysts, the current outbreak more closely resembles the SARS virus in 2002/2003 than previous epidemics such as the H1N1 in 2009/2010 and MERS, or the Middle East respiratory syndrome, in 2015.

In 2003, due to the impact of the SARS epidemic, GenM saw its revenue decline 1% year-on-year (y-o-y), while net profit fell about 21%. But during the first half of 2003 at the peak of the SARS epidemic, the company saw its revenue fall 8% y-o-y and revenue plunge 45% y-o-y.

Genting, which is also involved in the plantation and power-generation businesses, on the other hand, saw its revenue grow 20% y-o-y and net profit decline 6% y-o-y in 2003.

The Singaporean integrated resorts did not exist during the SARS epidemic.

According to Maybank Investment Bank’s (MaybankIB) estimates, China tourists account for less than RWG’s net revenue and 30%-40% of Singapore’s gross gaming revenue.

Nevertheless, it notes, pandemics tend to deter not only international gamblers but domestic gamblers as well.

With the spike in the novel coronavirus cases shortly before the start of the Lunar New Year dampening investor sentiment, shares of the Genting group have been subject to mild selling pressure over the week.

Year-to-date, GenM’s shares had lost about 8%, while GenS had fallen about 6% and Genting about 9%.

Yesterday, GenM’s shares shed seven sen to close at RM3.02, while GenS fell half a Singapore cent to close at 86.50 Singapore cents, and Genting fell 10 sen to end at RM5.50.

Meanwhile, MaybankIB implores investors not to be averse to the casino industries of Malaysia and Singapore during this seemingly uncertain time.

“During the SARS pandemic, Beijing introduced the now ubiquitous Individual Visit Scheme to Macau and the Malaysian government considered reviewing casino duty rates for RWG, ” it explains.

“There could be upside for GenM, Genting and GenS if the Malaysian government rolls back some of the 10-percentage-point casino duty rate hike and/or the Singapore government rolls back some of the 50% casino entry levy hike during this Wuhan epidemic, ” it adds. Similarly, CGS-CIMB Research says based on past experiences, the earnings impact on the Genting group could be short-lived.

“Share prices would recover once the pandemic is eventually contained, ” it says.

Kenanga Research, on the other hand, notes the sell down in the market as a result of the current virus outbreak is an opportunity to buy for those insufficiently positioned in equities. It anticipates a V-shaped recovery on tourism and retail-related stocks, including Genting and GenM, once the outbreak is contained.

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