RHB is upgrading its call on Genting Malaysia (GENM) to buy from neutral with a new target price of RM2.59 from the previous RM2.66, 16% upside and c. 5% yield.
Despite facing a significant decline in earnings to -RM900 mil in its second quarter ended June 30, 2020 (2Q20) compared to RM416.4 mil in 2Q19, Resorts World Genting (RWG) has been seeing an encouraging business recovery since reopening and some overseas operations have resumed.
“We believe the worst is over for GENM and that is a clear winner in a cyclical recovery environment as we move closer to a potential Covid-19 vaccine,” RHB Research analyst Lee Meng Horng said in an August 28 note.
According to him, the negative deviation was mainly caused from higher-than-expected operating costs during the quarter.
“Despite the losses, an interim dividend of 6 sen per share was declared, which came as a positive surprise,” Lee added.
Additionally, GENM’s 2Q20 financial results showed its revenue at RM114.9 mil versus last year’s RM2.6 bil, which was mainly dragged by the closure of facilities.
“While cost cutting measures led to lower operating expenses, it was not enough to mitigate the 95.6% year-on-year (y-o-y) revenue decline,” Lee said. “Finance costs also rose 102% on higher borrowings. All in, 1H20 saw a RM780.7 mil core loss compared to 1H19’s RM903.2 mil profit.”
Since the reopening of most businesses, daily visitor arrivals at RWG have increased from 30,000 to 45,000, c. 57% of pre-MCO levels.
Hotel rooms in operation have also risen from 1,800 to 4,700, with the occupancy rate currently at c. 90%.
In terms of overseas operations, most of Genting’s land-based gaming operations in the UK have reopened while the US operations remain closed, causing the cash burn rate to drop by c. 30% and is expected to mitigate losses.
“We widen our FY20F loss forecast to RM738 mil (from a RM393 mil net loss) after taking into account of the weak 2Q20 results and delay in reopening of its overseas operations,” Lee said. “We also lower our FY21F-FY22F earnings estimates by 7.3%-6.2% on higher financing cost assumptions.”
Lee believes that the worst quarter for GENM has passed and RWG is heading towards an encouraging recovery.
“While social distancing rules and international travel restrictions will affect near-term recovery, GENM’s generous dividends continue to reflect its sturdy balance sheet in difficult times,” he added. “Moving towards a potential Covid-19 vaccine, GENM is a clear winner of cyclical recovery.”
As of 12.35pm today, GENM’s share price dropped at 0.88% to RM2.26 with a market capitalisation of RM13.42 bil. – Sept 1, 2020
