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Monday, February 10, 2020

Genting Malaysia Berhad - Temporary Setback

Genting Malaysia’s (GENM) share price has taken a beating recently, falling by as much as 10% due to fears surrounding the coronavirus outbreak and its impact on earnings. The group has since announced cancellation of all tour bookings from China for February as a precautionary measure to reduce the risk of spreading. Note that Chinese tourists only accounted for a small fraction of Resorts World Genting’s (RWG) visitor count at c.4%. 

Nevertheless, public fear over the possible contraction of the virus will lead to even the locals refraining from visiting crowded places like theme parks and casinos. This is likely to affect GENM’s 1QFY20 performance. Based on our estimates (worst case scenario), the absence of Chinese and Singaporean tourist arrivals at RWG (for a period of 6 months) could hurt GENM’s FY20F earnings by c.18%. 

However, note that the outdoor theme park is expected to open by the middle of this year and could help to attract more visitor arrivals in 2H20. At this juncture, we leave our earnings forecasts unchanged. Trading at a 1-year forward PER of 12x, which is slightly above -1SD of 11x (Figure 1), we think this presents a bargain-hunting opportunity. 

Hence, we raise our rating from Neutral to Trading Buy. We forecast a regular FY19F DPS of 9sen (excluding potential special dividend), translating to a yield of c.3%.

Chinese tourists not a major contributor. Last week, the group announced the cancellation of all tour bookings from China for the month of February. Traditionally, the peak period for RWG is during the year-end and Chinese New Year holidays. 

Hence, we believe the high visitor arrivals would probably have been captured between December 2019 and January 2020 prior to the scare.

 Chinese tourists accounted for about 4% of total visitor count. Although Chinese tourists are not a major contributor (day-trippers made up of about 75% of total visitors), overall visitorship is expected to be affected (particularly those from Singapore as well) in 1QFY20 as tourists stay away from crowded places.

How long will this last? Thus far, although transmission speed of the novel coronavirus is faster than previous outbreaks, it remains mostly confined to China with a lower fatality rate of around 2%. Based on transmission patterns of past outbreaks, weak sunlight and colder temperatures in the northern hemisphere may have helped in the spreading of the virus. 

However, this may be suppressed as sunshine intensifies with warmer temperatures from May to September. Nevertheless, history may not necessarily be an accurate guide as this coronavirus is new and could behave differently.

Worst case scenario. Assuming Chinese and Singaporean tourists stop travelling to RWG for six months, we estimate GENM’s FY20F earnings will drop by about c.18%. Imputing a PER of 11x (based on -1SD of 10-year historical) on Malaysia’s earnings, our SOTP-based valuation will then fall to RM2.70. We see this level as the potential downside to its share price if the outbreak prolonged.

Source: PublicInvest Research - 10 Feb 2020

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