PETALING JAYA: Genting Malaysia Bhd’s (GenM) plan to acquire Empire Resorts Inc’s (ER) entire 1,510 Series F Convertible Preferred Stock from Kien Huat Realty Sdn Bhd (KHR) has been viewed as a negative development for the gaming and resort operator.
This is because the New York-based Empire Resorts is expected to remain loss-making for the next five years, according to CGS-CIMB Research.
The brokerage trimmed its target price for GenM to RM3.25 from RM3.30 previously after factoring in the company’s US$100mil (RM438.5mil) Series F acquisition as well as the brokerage’s reduction in forecast earnings by 0.3% to 0.4% for GenM for its the financial years ending Dec 31, 2022 (FY22) to FY24 on higher net debt.
The research house , however, maintained its “add” recommendation on GenM.
“We see this acquisition as a negative development for GenM as we project ER to still be loss-making over the next five years and this acquisition increases our projected net debt/earnings before interest, tax, depreciation and amortisation (ebitda) for GenM by end-FY23 from 2.49 times to 2.63 times,” the brokerage said.
GenM said in a filing with Bursa Malaysia on Tuesday that the acquisition for a total consideration of US$100mil (RM438.5mil) would be funded via internally generated funds. The proposed acquisition would bring the group’s total investment in ER from US$524.4mil (RM2.31bil) to US$624.4mil (RM2.75bil).
According to CGS-CIMB Research, the full conversion of the entire Series F, G and L into common stock would take GenM’s effective shareholding in Empire Resorts to about 76.3% from 66.6%.
“If GenM buys out KHR’s remaining 23.7% effective stake over time, it may have to fork out a further US$244.3mil (RM1.07bil), based on this latest valuation of ER shares. This would further lower GenM’s fair value to RM3.08 (including 15% holding company discount),” it explained.
The research firm noted that Resort World Catskills’ (RWC) gross gaming revenue and ebitda had been improving this year while the expected opening of Resorts World Hudson Valley (RWHV) in December 2022 could further improve ER’s financial performance.
However, the medium to longer-term outlook was difficult to ascertain, as ER could be negatively affected by the issuance of up to three New York downstate full casino licences in 2023.
This development could lead to potential cannibalisation of RWC and RWHV, which are located only one to two hours away from New York City, according to CGS-CIMB Research.