GENM (FV RM4.21 - BUY) 1QFY12 Results Review: Squeezed by Weaker Hold Rates

The group’s annualised 1QFY12 results were below both consensus and our fullyear estimates, weighed down by lumpy bad debt provisions  at  its UK gaming operations and  a  lower luck factor  at  its domestic gaming business.  Its  core gaming volume in Malaysia, which remained relatively resilient, expanded by  an average high single-digit. RWNY, which only began operation in 4Q11, contributed 9% to the group’s 1Q12 EBITDA.  Maintain BUY with a fair value of RM4.21.

Below expectations. Adjusting for exceptional items which included pre-operating expenses (RM17.7m) and construction cost overruns (RM48.2m) from Resorts World at New York (RWNY),  the group’s  annualized 1QFY12 net profit was 22.8% and 23.3% below consensus and our full-year  estimates. The  weaker than expected results were attributable to three key factors:  i)  a  lower VIP win rate from  the group’s  domestic gaming business,  ii)  lumpy bad debt provisions of RM39.6m from its UK casino VIP operations, and iii) ramp up in promotion and marketing expenses at RWNY. If we were to normalize the lumpy bad debts provisions from its UK gaming operations, the group’s annualised earnings underperformance would have been a less  pronounced  -14.1%,and largely owing  to a lower VIP luck factor at its domestic VIP gaming operation.

Malaysian casino op resilient. Normalising the lower win rates, the group’s Malaysian casino operation, which comprises the bulk of group earnings (at 90%), reported high double-digit gaming volume  growth  but  low single-digit mass market gaming volume growth. However, due to lower win percentages, revenue declined 1% y-o-y and 5% q-oq. Meanwhile, overall visitor growth  rose  2% y-o-y while  its foreign visitor growth was driven by Singapore (+4% y-o-y) and Indonesia (+11% y-o-y) as it faced competition from the Singapore integrated resorts. Overall domestic day tripper continues to contribute  the bulk of the total visitor arrivals at a  steady 74%, while  hotel occupancy remained relatively robust at 91%.

Lowering FY12 earnings forecast. Factoring in the lower domestic gaming win percentages and lumpy bad debt provision  in relation to  its UK gaming operations in 1Q12, we are revising downwards our FY12 earnings estimates by 6.5% but retain our FY13 estimates. Our fair value is hence nudged down to RM4.21. 

Source: OSK