Genting Malaysia (4715), a crisis or opportunity? (Part 1)

Due to various negative news, including the recent Covid-19 outbreak, Genting Malaysia Berhad (GENM)'s share price has slumped to the historical low price level (RM2.26) since the 2008 financial crisis. 

Warrent Buffet once said that: "During the economic downturn, these businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now. Downturn provided an opportunity for investor to buy strong companies at low prices."

So, is GENM a good buy right now?

Before we make a conclusion on that, we should look at GENM's business model and the company financial to identify whether GENM is a strong company which can sustain its business during the crisis.

Company Background

Genting Malaysia Berhad was incorporated in 1980 by the late Tan Sri Lim Goh Tong and listed in 1989. The Group is involved in the leisure and hospitality industry. GENM's current chairman and chief executive is Tan Sri Lim Kok Thay, the second son of Tan Sri Lim Goh Tong.

Source: GENM annual report 2019

GENM main business source is from its gaming operation (casino), which constitute to almost 74% of its revenue. The revenue from gaming operation is depend on luck and number of visitors. 

Risks

Covid-19 Outbreak

The close down of operation from mid-March to April 2020 due to Covid-19 outbreak will definitely affect its revenue during the period. And the visitor is expected to reduce this year even after the Restriction Movement Order. Hence, GENM's revenue is expected to be affected by Covid-19 outbreak significantly on 2020.

Most of GENM's operation is temporarily suspended at the moment due to Covid-19 outbreak:

1. Major resort properties:

i)                    Resorts World Genting in Malaysia (temporarily suspended)

ii)                   Resorts World Casino New York City (temporarily suspended)

iii)                 Resorts World Catskills (which is 49%-owned via an associate company) in the            United States (temporarily suspended)

iv)                 Resorts World Bimini in the Bahamas (temporarily suspended)

v)                   Resorts World Birmingham (temporarily suspended)

     2. Casinos:

i)                    About 40 casinos in the United Kingdom (temporarily suspended)

ii)                   Crockfords Cairo in Egypt

    3. Seaside resorts:

i)                    Resorts World Kijal in Terengganu  (temporarily suspended)

ii)                   Resorts World Langkawi on Langkawi island (temporarily suspended)

Hiking of Casino Duty

In Malaysia Budget 2019 on 2018, Finance Ministry has announced the increase of 10% of casino duty on profit, from 20% to 30%. Besides, the tax on casino was increased from RM120 million annually to RM150 million. These has reduced GENM's EBITDA on 2019 by 8%.

Privatisation of Loss Making Company, Empire Resort

On November 2019, GENM had completed the privatisation of Empire Resorts, Inc together with Kien  Huat Realty III Limited. GENM is holding 49% of the share while the remaining (51%) is belong to Kien Huat Realty III Limited. Kien Huat is an investment vehicle controlled by Tan Sri Lim Kok Thay. 

Source: GENM annual report 2019

The share of loss from Empire Resorts is RM79 during 2019. Since Empire Resorts is acquired on November 2019, hence the loss recorded in GENM's book is only include the transaction from Nov'19 to Dec'19. I extrapolate the loss to 12 months to estimate its effect to GENM's 2020 book. According to my calculation, the loss may have negative impact on GENM's profit after tax by 36%.

Catalysts

Opening of Outdoor Theme Park

Genting Highland outdoor theme park is expected to be opened on 2020, however, due to Covid-19 outbreak, it may delay to end of this year or next year. The opening of outdoor theme park and end of Covid-19 outbreak will certainly increase the number of visitors to Genting Highland.

Although the revenue from outdoor theme park may not be significant to GENM's revenue (On 2012, GENM's outdoor theme park contribute less than 10% of revenue), the increase of number of visitors will indirectly contribute to the number of visitor to its casino.

GentingBet

GENM has introduced its online casino, GentingBet in United Kingdom. Although its revenue contribution is not significant at the moment, however, it may become the catalyst of GENM's gambling business in the future.