GenM Aqueduct bid not bolting out of the gates yet

Genting Malaysia Bhd
(July 8, RM2.54)
Upgrade to hold from sell at RM2.62 with target price RM2.48: Early yesterday morning, the New York Lottery announced that it had disqualified SL Green and Penn National Gaming from the Aqueduct racino bid. That leaves GenM as the sole bidder. GenM appears to conform to all requirements of the bid submission process and will continue to be evaluated. If GenM ultimately is not approved by the Aug 3 deadline, the bidding process will be restarted.

The two were disqualified because they submitted bids which contained material deviations from the prescribed MOU. That said, SL Green and Penn National’s concerns that the US$300 million (RM960 million) licensing fee is not refundable should the bid winner eventually terminate the licence, still fluid tax regime, refusal to guarantee that no other gaming facility will be opened within 50 miles and profitability are alarming.

According to our rudimentary analysis, in its first full year of operations, the Aqueduct will generate US$23.2 million (RM74.2 million or 6% of FY10F net profit) in net profit. Assuming 3% growth per year (World Economic Outlook long-term GDP per capita forecast for USA) over the 30-year concession period and ascribing our GenM weighted average cost of capital of 10.8%, it will yield a discounted cash flow (DCF) value of US$265.7 million, or US$34.3 million short of the licensing fee. SL Green and Penn National Gaming’s concerns are not totally unfounded.

We maintain our earnings estimate for now pending the results of the bid and finalisation of Aqueduct’s tax regime. Overall, we are neutral to marginally negative on the bid. We would be concerned should GenM be required to invest more than the licensing fee into the Aqueduct. Management explained that New York may introduce table games at racinos going forward, ala Pennsylvania which will be introducing table games, but we find it presumptuous to assume so yet.

We maintain our RM2.48 target price based on DCF of existing operations only. As there is now only less than 5% downside risk, we revise our call from sell to hold. Although we believe that GenM’s share price may have hit the trough, its uninspiring investment track record to date, in our opinion, does not warrant a buy call. — ECM Libra Research, July 8


This article appeared in The Edge Financial Daily, July 9, 2010.