Casino stocks con­tinue to fall

But some an­a­lysts are main­tain­ing their ‘buy’ calls on Gent­ing and Gent­ing Malaysia

The Star Malaysia - StarBiz - - Companies & Strategies - By DANIEL KHOO danielkhoo@thes­tar.com.my

A NO­TABLE num­ber of an­a­lysts have con­tin­ued to main­tain their “buy” calls on Gent­ing Bhd and Gent­ing Malaysia Bhd (GenM) de­spite the un­ex­pected an­nounce­ment of ad­di­tional taxes that will be im­posed on casi­nos in Malaysia.

Af­ter the an­nounce­ment of the ad­di­tional levies and taxes, both com­pa­nies had seen a sus­tained sell­down in their re­spec­tive shares when trad­ing re­sumed last Mon­day due to their ex­po­sure, via the casino own­er­ship, to Gent­ing High­lands.

Gent­ing, which has a ma­jor­ity 49.3% stake in GenM, will also be im­pacted but to a lesser ex­tent be­cause its fi­nan­cials are also backed up by own­er­ship of other com­pa­nies such as Gent­ing Sin­ga­pore (GenS), Gent­ing Plan­ta­tion (GenP) and Land­marks Bhd.

De­spite that, the sell­down was clearly seen in not one but both stocks with Gent­ing tum­bling 9% in a week while GenM had de­clined 21.15% since Bud­get 2019 was an­nounced.

Both Gent­ing and GenM are trad­ing at 34 month-low and 38-month lows re­spec­tively at the present mo­ment.

Po­ten­tial buy­ers or sellers of the stock would also be mind­ful to note that the com­pa­nies have a diver­si­fied in­come base, not only for Gent­ing (which owns a 49.3% stake in GenM) but also GenM. Deal­ers who closely mon­i­tor buy and sell sen­ti­ments say a bot­tom may soon be in sight and that a re­bound could be around the cor­ner due to over­sold con­di­tions, but some an­a­lysts who study the stock fun­da­men­tals dis­agree and have down­graded the stock to ei­ther a hold or sell. “In the week we saw a strong bat­tle be­tween the bulls that would like to drive the stock up and the bears, the camp that would like to see a fur­ther sell­down in the stock. Af­ter in­tra­day short sell­ing was im­ple­mented by Bursa in April, we see anec­do­tal ev­i­dence that the bulls are be­ing more cau­tious now be­fore buy­ing in again. Af­ter all sen­ti­ment in mar­kets abroad is still frag­ile at this point,” a dealer says.

RHB Re­search’s Alexan­der Chia is one of those who had main­tained his buy call on Gent­ing with a low­ered tar­get price to RM11.50 from RM12.60 and pegged to an un­changed 20% hold­ing com­pany dis­count to its reval­ued net as­set value es­ti­mate of RM14.39.

While he had fac­tored in the re­duc­tion in bot­tom­line with a cut of the fi­nan­cial year 2019 to 2020 earn­ings per share by circa. 6% to fac­tor in the 10 per­cent­age points hike in casino du­ties and RM30mil in­crease in casino li­cence fee he also saw other fac­tors that could bal­ance out this earn­ings re­duc­tion.

His re­port notes that there may be other mit­i­gat­ing fac­tors and this could be the rea­son why the buy call had been re­tained.

A pos­i­tive is that the Min­istry of Tourism which aims to achieve 30 mil­lion for­eign tourists ar­rivals by 2020 will be a pos­i­tive for GenM given the own­er­ship of Gent­ing High­lands.

“Its fa­cil­i­ties opened un­der the Gent­ing In­te­grated Tourism Plan (GITP) would con­tinue to draw tourists to the hill­top. While for Gent­ing Malaysia, the open­ing of the 20th Cen­tury Fox theme park re­mains the ma­jor re-rat­ing cat­a­lyst for the stock. How­ever, up­side is lim­ited, with re­cent de­vel­op­ments in the Bud­get 2019,” RHB Re­search said. It rates GenM as “neu­tral” with a tar­get price of RM4.26.

For GenM, the an­nounce­ments of ad­di­tion- al levies and taxes in Bud­get 2019 had prompted Al­lianceDBS Re­search’s an­a­lyst Cheah King Yoong to im­me­di­ately down­grade the stock to a hold from a buy pre­vi­ously with a low­ered tar­get price of RM4.65.

“The puni­tively high casino tax and in­creased casino li­cense fees an­nounced by the fed­eral gov­ern­ment sur­prised even the most bear­ish fore­cast­ers and will ad­versely im­pact the group’s earn­ings prospects. Even with the pro­gres­sive launch of GITP, we es­ti­mate the group’s earn­ings to drop by 26% year-on-year in FY19,” Al­lianceDBS’ re­port says.

The re­port notes that Cheah’s earn­ings fore­cast is below con­sen­sus and be­liev­ing that GenM could take longer than ex­pected to op­ti­mise its re­turns on the GITP.

It is also no­table that GenM has over­seas op­er­a­tions that con­trib­utes to its earn­ings and in 2017 this amounted to around 20% of its earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­sa­tion. GenM op­er­ates 40 casi­nos in the UK and also Crock­fords Cairo, a lux­ury des­ti­na­tion in Egypt. In the US, GenM also op­er­ates the ra­cino (race track and casino) lo­cated at Aqueduct Race­track in New York City and Re­sorts World Bi­mini in Ba­hamas.

Other than these hold­ings, the com­pany also owns prop­er­ties world­wide which in­cludes a ho­tel, of­fice and re­tail space in Mi­ami, Al­lianceDBS notes in their re­port.

The di­ver­sity of GenM’s busi­ness may keep fur­ther sell­ing at bay in both Gent­ing and GenM and with pes­simism seen to be at a crescendo with the an­nounce­ment in Bud­get 2019, mar­ket ob­servers say that trad­ing in the weeks ahead could per­haps see some re­cov­ery in both stocks.

Down­trend: Gent­ing tum­bled 9% in a week while Gent­ing Malaysia has de­clined 21.15% since Bud­get 2019 was an­nounced.

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