THE reopening of Genting Malaysia Bhd’s flagship Resorts World Genting (RWG) some three weeks ago has received good response from patrons, a sign that the gaming company is on the road to recovery, albeit early days.
In an update on the gaming stock from the recent Invest Asean 2020 conference, an investment bank told its clients that the estimated footfall at the RWG complex on the hilltop of Genting Highlands reached half the numbers it used to see prior to the Covid-19 outbreak.
Recall that Malaysia’s glitzy city of entertainment reopened its doors on June 19 after being shuttered from March 18 as part of efforts to curb the spread of Covid-19.
According to the investment bank, the gaming company’s management is now planning to open another tower at its First World Hotel for an additional 1,400 rooms, besides the 2,000 hotel rooms it initially reopened.
However, Genting Malaysia’s casinos in the United States and the UK remain closed for now.
“Focus is on Malaysia, which contributes over 80% of earnings before interest, taxes, depreciation, and amortisation or EBITDA, ” the bank says in the note.
Nonetheless, analysts say earnings recovery for the company is likely to be patchy post-lockdown.
TA Securities’ Tan Kam Meng says he does not expect a “V-shaped earnings recovery, at least not in the second half of this year.”
“Earnings for this year will be a wash-out and investors should look into financial year 2021 (FY21) for a recovery play, ” he says.
Going by Macau’s experience where all casinos were ordered to close for 15 days in February, he says recovery in gaming volumes after reopening has remained at a snail’s pace since March.
“Footfall and gaming volume are two different things. Gaming companies derive the bulk of earnings from the latter, especially from high-rollers and the VIP segment, ” he says when contacted.
He notes that the monthly gross gaming revenue for Macau casinos fell between 80% and 97% year-on-year (y-o-y) for the March to June period because of Macau border control with the rest of the rest of the world, including China and Hong Kong.
He adds despite operational difficulties for casino concessionaires, Macau policymakers are not motivated to loosen the harsh travel policies implemented.
Back to Malaysia, some pent-up demand has returned to the resort casino with domestic travel the only option currently. That said, maximum capacity for its casino remains limited due to social distancing measures, analysts say.
“The reopening has restored investor sentiment to a certain extent, but business volume will pick up gradually, ” concurs another analyst.
Kenanga Research expects Genting Malaysia’s 2Q20 earnings to be worse and badly hit as its business was practically closed for almost a calendar quarter.
The “cash burn” from this shutdown for the Malaysian is believed to be around RM4mil a day – an amount it has been able to absorb, being part of the cash-rich Genting group.
As far as valuation goes, Kenanga Research feels that the stock remains fairly attractive as the rebound from the lows in mid-March amidst the market meltdown has yet to fully regain the oversold position.
At the height of market meltdown on March 19, Genting Malaysia and its parent company Genting Bhd saw their share prices plummet 41% and 51% year-to-date, at that point.
Since then, prices have recovered some 20% and 31%, respectively.
The brokerage foresees Genting Malaysia returning to the black in 3Q20 but profits to come in lacklustre because a “business as usual” to pre-Covid-19 level is unlikely any time until next year.
On the other hand, Kenanga Research believes that earnings recovery for number forecast operators (NFOs) would be faster than Genting Malaysia given that social distancing is likely to have less impact on NFOs. As for casinos, they are faced with the operating space factor, as well as the cross-border travelling restriction.
In 1Q20, the company slipped into the red with a net loss of RM418mil. Visitor arrivals to the hill-top resort were down by nearly one-third in 1Q20, while Ebitda from Malaysia operations was down 40% y-o-y. For the full year, analysts expect Genting Malaysia to generate a net loss in FY20. They see a “meaningful rebound” in FY21, however, net profit comparable to FY19’s RM2bil level, would only come in FY22.
TA Securities’ Tan sees the odds turning in favour for the stock from the third quarter should there be greater clarity on a Covid-19 vaccine.
He believes a vaccine success story would be a major game changer for the casino-com-entertainment industry as it would spur consumers’ confidence in social gathering.
“Optimistic scientists hope that a viable vaccine may be ready by the end-2020. If this is true, we are now six months closer to finding a vaccine since the first outbreak in China.
“As such, we believe the dampening economic factors we saw in the first half of the year, such as lockdowns and border control, are already behind us, ” says Tan, who does not think the shares of Genting Malaysia and Genting will drop to their lows in 1H20.
Analysts say near-term catalysts for the stock are more relaxed guidelines from the Malaysian authorities come Aug 31 when the recovery movement control order phase ends.
Another catalyst is the reopening of Genting Malaysia’s UK and US casinos, which some reckon would be happening soon. A medium-term catalyst, meanwhile, would be the launch of its outdoor theme park, now delayed to 2Q21.
Tan also believes that Budget 2021 will likely be a non-event for the gaming sector.
“Gaming companies are in the midst of a healing process after reopening. To reduce operating costs, Genting Malaysia has already laid off 3,000 workers.
If there are any negative budgetary policies that will hit the gaming companies again such as gaming tax hike, this is adding fuel to fire and may cause additional layoffs to save costs, ” he adds.
Business-wise, Genting Malaysia is also undertaking other initiatives such as having more electronic games and targeting the VIP or premium mass segment, according to the report by the investment bank.
It writes that management sees an opportunity to tap VIP players who are grounded here and unable to go to Cambodia, Singapore or Macau to gamble due to border closure.
Interestingly, the bank adds that management was not able to comment on dividends, but suggested looking into the second half of the year performance of RWG to assess dividend potential.
“Genting Malaysia still paid out the five sen final dividend per share declared for 2019. The 2020 dividend (if any) will be decided by the board of directors, ” the bank’s note to clients says.
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