Genting Malaysia - What is GenM’s return on its investments? BUY

- Maintain BUY on Genting Malaysia Bhd (GenM) with an unchanged RNAV-based fair value of RM4.30/share.

- Risk to share price is the outcome of general elections. There is risk that if the opposition were to win the elections, then they might increase the gaming tax rate from 25%.    

- In this report, we take a look at the return of GenM’s major investments in the past five years. 

- In spite of the group’s mixed record in investing, we are keeping our positive stance on GenM for the resilience of its profits from  “Resorts World Genting” and growing earnings contribution from UK and New York. 

- We find that most of the return on GenM’s investments is below the IRR (internal rate of return) of 15%. Although the group has never revealed its internal IRR, we have assumed it at 15%. 

- According to  Bursa Announcements, GenM made six major acquisitions in the past five years. We have counted the subscription of debt papers in Wynn Resorts and MGM Mirage as one investment. Out of the six investments, about half were related party transactions. The return on these investments ranged from negligible to 11.1%.  

- One of GenM’s safest and highest yielding investments is the debt papers of MGM Mirage. MGM Mirage’s senior secured notes due November 2017 yield a return of 11.125% annually. 

- In total, GenM subscribed US$131mil (RM441mil) worth of notes in MGM Mirage and Wynn Resorts from FY09 to FY10. These give coupon payments of 4.25% to 11.125% annually. 

- GenM’s worst investment is its RM250mil subscription of a 10% equity interest in Walker Digital Gaming LLC in FY08. We believe that so far, GenM has not received any dividend payment from Walker Digital for its 10% stake in the company.

- Instead, we estimate that GenM recorded impairments of up to RM156.6mil in respect of its investment in Walker Digital Gaming. Silver lining is that a few of Walker Digital’s gaming patents such as Elite Baccarat have been used at “Resorts World Genting”. 

- We estimate the return on GenM’s investments in New York and UK at 8.0% to 9.6% each based on the EBITDA of the respective division. If interest expense and depreciation were taken into account, then the return on investments in the assets would be lower than that. 

Source: AmeSecurities