Casino stocks continue to fall
But some analysts are maintaining their ‘buy’ calls on Genting and Genting Malaysia
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.