This article first appeared in The Edge Financial Daily on November 7, 2018

Genting Malaysia Bhd
(Nov 5, RM3.61)
Downgrade to market perform with a lower target price (TP) of RM4.75: We cut our rating on Genting Malaysia Bhd to “market perform” from “outperform” as the 10% hike in casino duties and RM30 million increase in casino licence fees following last Friday’s Budget 2019 announcement are negative earnings as well as stock sentiment. As such, financial year 2019 (FY19) estimates are set to reduce by 13% and we have lowered our TP to RM4.75 from RM5.75 previously.

Last Friday, the finance minister tabled Budget 2019 in Parliament and that the taxes, fees and levies on the gaming industry which have not been increased since 2005 will see casino licences increased to RM150 million per annum from RM120 million, while casino duties will be increased up to 35% on gross collection from 25% previously.

It is negative. The news came as no surprise given that the new Pakatan Harapan government is looking for a new source of revenue to fill up the shortfall in tax revenue following the removal of the goods and services tax in June. This was also reflected in the stock following the selldown since August, which saw its share price tanking 13% in the past three months.

We have assumed that the new measures are to take effect in 2019. Thus, the 10% hike in casino duties on gross collection and RM30 million increase in casino licence fees on the Malaysian operation will impact FY19 earnings negatively by 13%. This also means that FY19 earnings are expected to decline by 6% after a strong earnings growth of 29% was estimated for FY18.

The Genting Integrated Tourism Plan (GITP) is the key focus going forward despite hikes in casino duties and licence fees, as the new gaming floor which has opened since end-2018 and new retail spaces should contribute to the bottom line. However, we have remained cautious about its VIP-centric UK operations, which could be volatile, while the Resorts World Birmingham may need more time before showing meaningful results. Meanwhile, Resorts World Casino New York City numbers should be sustainable, while the Resorts World Bimini is striving to be profitable by year end.

Post-earnings revision, our sum-of-parts (SoP) valuation is reduced to RM5.28 per share from RM5.75 per share previously. However, in view of the negatively-biased news which will affect stock sentiment badly, we have decided to subscribe to a 10% discount to the SoP valuation to derive a new TP of RM4.75. Downside risks to our downgrading call include better luck factor and stronger casino volume. — Kenanga Research, Nov 5