Genting Malaysia Bhd
(May 25: RM3.52)
Maintain outperform at RM3.51, lower fair value of RM4.40 (from RM4.45): We understand electronic table games (ETGs) could be among the 2,500 machines to be operational in the first phase of Genting Malaysia’s Aqueduct New York racino, but this has not been approved yet.

We understand that management is also currently lobbying for table games to be included in the racino so as to compete on a level playing field with the tribal casinos in New York state.

While we believe Genting Malaysia should be able to get approval to have ETGs in the racino, we believe it is harder to get approval for normal table games.

Of the total US$350 million (RM1 billion) capital expenditure for the racino, about 60% to 70% has been spent already, which implies that the racino is progressing well and the first phase is on track to be completed sometime in 3QCY11.

The Malaysian operations are likely to still see some cannibalisation effect in 1Q11 from the Singapore casinos, given that this is the first year when both the integrated resorts in Singapore have been fully open for the peak Chinese New Year period.

The CNY period in Malaysia is therefore likely to have seen lower revenues on a year-on-year basis in 2011, both from a lower number of visitors as well as less spending.

Genting Malaysia is trying to address this issue by paying more attention to its Malaysian clientele and existing members to take up the slack from the Singaporeans. In addition, the company is doubling its refurbishment capex to RM500 million to RM600 million this year to refresh the look of the resort and to attract new customers.

The risks include: (i) a slower than expected global and regional economic recovery, which could affect domestic sentiment and visitor arrivals; (ii) lifting of domestic subsidies for food and transport costs, which would lower disposable income; and (iii) intensifying competition from regional players.

Post-earnings revision, our sum-of-parts-based fair value has been reduced to RM4.40 (from RM4.45). We believe the upcoming commencement of operations of the racino could be the catalyst for a stock re-rating.

We believe that as news flow about the racino starts to become more forthcoming and the completion of the first phase draws nearer, the reality of the project and its earnings potential would become clearer to investors.

We believe that this could result in earnings upgrades for the stock and valuations would therefore look more attractive. As it is, Genting Malaysia continues to trade at a huge 30% to 40% discount to its regional peers. — RHB Research, May 25

This article appeared in The Edge Financial Daily, May 26, 2011.