Genting Malaysia Bhd
(Aug 11, RM2.78)
Maintain sell at RM2.80 with target price RM2.40: Shareholders of vendor Genting Singapore (GS) will meet on Aug 18; Genting Malaysia (GM) will meet on Aug 24. The circulars and notices of EGMs have been despatched. GS’s documents imply the £340 million (RM1.7 billion) cash consideration for the UK casino businesses is generous while GM’s say it is fair. We agree with the former.
GM sees a growth opportunity in being the largest UK casino operator. It believes the UK economy is in a trough and sees synergies, operating efficiencies and new business opportunities. Still, it agrees the earnings impact will not be material in the near term. Pro forma, the acquisition would have added RM4 million or 0.3% to GM’s 2009 net profit. The UK casinos made £700,000 net profit in 1Q2010 and £10 million in 2009, following losses totalling £53 million in the previous three years.
GS sniffs at “narrow synergies”. It notes the UK operations are of 44 casino-centric properties spread throughout England and Scotland. In contrast, Resorts World Singapore is a tourism destination encompassing a casino, hotels, restaurants, retail, theatre and a theme park. We note GM’s existing Genting Highlands resort in the Pahang mountains is a similar tourism destination.
Optimism surrounding UK gaming industry has dissipated. In its letter to the independent directors of GS, KPMG Corporate Finance notes the 14.1 times FY2009 EV/Ebitda selling multiple surpasses the 13.1 times mean and median of comparable transactions. Further, it notes comparable transactions were completed from 2003 to 2006 at a “relatively buoyant time”. Since then, aspects of regulation and implementation have disappointed industry analysts.
RHB Investment Bank says 11.2 times FY2011 EV/Ebitda is “fair”. However, we disagree with what it considers “comparable companies”. Its list includes global gaming giants and Macau plays. GM minority shareholders will decide a week from Tuesday. Major shareholder Genting Bhd and related parties collectively holding 49% of the shares will abstain from voting. — Maybank IB Research, Aug 11
This article appeared in The Edge Financial Daily, August 12, 2010.
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