This article first appeared in The Edge Financial Daily, on May 26, 2016.

Genting Bhd
(May 25, RM8.35)
Maintain buy with a reduced target price of RM9.54: Genting Bhd’s first financial quarter ended March 31, 2016 core profit after tax and minority interests (Patami) of RM468.9 million came in within expectations, accounting for 26.1% and 26.3% of our and consensus full-year estimates.

Genting’s Malaysia operation was stable with healthy earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 35% and improved volume, offset by lower hold percentage and goods and service tax impact. The much awaited Genting integrated tourism plan is poised to ramp up its first-phase opening consisting of Sky Avenue (retail space) and new cable car system by the second half of calendar year 2016 (2H16). Resorts World Sentosa’s revenue was down due to shift of policy, slowdown in VIP segment and loss of market share. The prolonged volatile impairment on trade receivables from previous year will only be cleared by year end given the overall challenging collection activities.

Improved condition from its United Kingdom operation, better hold rate from its premium players business and higher bad debt recovery masked the overall lower total volume. Operation in the United States is rather stable with better performance expected at Bimini in 2H16 given the full commencement of Hilton Hotel by June. Plantation operation in Malaysia recorded contraction in Ebitda mainly due to sharp decline in fresh fruit bunch production affected by the lagged impact from dry weather in the previous year.

Ebitda was higher year-on-year (y-o-y), driven mainly by the construction of the 660mw coal-fired Banten Plant in Indonesia; meanwhile its oil-and-gas segment contracted given lower oil prices and the group expects no exploration drilling activities for 2016 as Kasuri Block enters its pre-development phase. Besides that, the reported bottom line was affected by the foreign exchange market loss in foreign currency-denominated assets. Stripping it off, the adjusted core Patami declined by a mere 3.8% y-o-y.

We maintain a “buy” rating on Genting given its geographically diversified business, value and cash-rich position, which serve as a growth proxy for various undergoing expansion plans. Positives lie in its: 1) defensive stock and 2) new sources of earnings from international markets to drive earnings growth. Genting’s negatives are: a) it is in a highly regulated industry and b) leisure and hospitality’s earnings highly dependable on luck factor and hold percentage. — Hong Leong Investment Research, May 25