Genting - To sell power assets in Malaysia? Buy

- Business Times quoted sources as saying that 1Malaysia Development Bhd (1MDB) is buying another power asset, from Genting Bhd, for as much as RM3.5bil. 

- Sources said that the government-owned firm would be paying between RM3bil and RM3.5bil for Genting Sanyen. The source also said that the deal is reaching its final stage and will be announced soon.  

- We view this development positively. Genting Bhd would be a purer gaming company after the disposal of the power assets in Malaysia. The group sold its income-generating oil and gas assets in China in December 2010. 

- In addition, Genting Bhd would no longer have to worry about the extension of Genting Sanyen’s Power Purchase Agreement (PPA). Recall that Genting Sanyen’s PPA is due to expire in year 2015.   

- We reckon that most of the profits from the power division are driven by Malaysia. If Genting Sanyen were to be disposed of, then Genting Bhd would be left with power assets in China and associate stakes in power assets in India. 

- We estimate that Genting Bhd’s FY13F net profit would fall by 5% as the loss of earnings from the power division would not be fully compensated by additional interest income from the disposal proceeds of the Malaysian power division. In FY11, the power division accounted for 9% of Genting Bhd’s pre-tax profit. 

- The reported disposal price tag of RM3.0bil to RM3.5bil would value the power division at a price to net asset ratio of 1.1x to 1.3x (assuming 90% of the power division’s net assets are from Malaysia). 

- Based on a PE of 10x on the power division’s FY12F earnings, then the power division (including assets in China) is valued at RM3.1bil.   

- We maintain a BUY on Genting Bhd for its indirect exposure to the gaming industry in Malaysia, Singapore and Britain.   

Source: AmeSecurities