This article first appeared in The Edge Financial Daily on September 19, 2018 - September 25, 2018
Genting Malaysia Bhd
(Sept 18, RM4.87)
Maintain buy with an unchanged target price of RM5.70: Genting Malaysia Bhd has announced that the US federal government, via the Department of Interior (DoI), had recently issued a decision stating that the Mashpee Wampanoag Tribe would not be granted the disputed land in trust for developing the First Light Resort & Casino (FLRC) in Taunton, south of Boston, the US. The group is currently deliberating the appropriate course of action by working closely with the tribe to review all options available for the group’s investment in the promissory notes as well as its recoverability. The group’s total investment (including accrued interest) in the promissory notes as at June 30 amounted to US$426.3 million (RM1.76 billion), representing about 30 sen per share for Genting Malaysia, which is classified under “other non-current assets” in its balance sheet.
To recap, since April 2016, Genting Malaysia has invested in interest-bearing promissory notes issued by the Mashpee Wampanoag Tribal Gaming Authority for the initial development phase of the FLRC. In return, it has been appointed the manager of the casino for seven years from the opening date. Nonetheless, the project’s development hit a stumbling block due to an ongoing lawsuit against the tribe questioning the legality of its Native-American status.
Although Genting Malaysia has highlighted that it is currently reviewing all options available for the group’s investment in the promissory notes as well as its recoverability, we believe that the unfavourable decision made by the DoI could lead to potential impairment by the group on this investment in the coming quarters. A full impairment will shed off about 30 sen from its book value but will have no impact on our sum-of-parts valuation, as we view the potential impairment, if any, to be exceptional in nature and would not affect our core earnings estimates.
Despite the negative surprises, we deem the development to be non-recurring in nature and remain positive about the group’s longer-term growth prospects, supported by the progressive launch of the Genting Integrated Tourism Plan. — AllianceDBS Research, Sept 18