Kenanga Research said it is maintaining its earnings forecast for Genting Malaysia.
PETALING JAYA: Genting Malaysia Bhd
’s (GenM) additional equity injection into US-based Empire Resorts Inc is expected to yield returns over the next two to three years.
In view of the equity injection, Kenanga Research said it is maintaining its earnings forecast for GenM.
“We keep our financial year 2023 (FY23) to FY24 earnings intact as GenM is essentially using its balance sheet to bolster an investment with an 89.6% economic interest.
“More importantly, we expect Empire’s operations to gradually normalise with profits to show over the next two to three years,” it said in a report yesterday.
Nevertheless, the research house is downgrading the stock to a “market perform” from “outperform” previously.
“We believe its key earnings driver, Resorts World Genting, is benefiting from the normalisation of domestic and regional travel.
“Visitors from China may still need time to recover to the pre-pandemic level but the trajectory is encouraging so far.
“As such, we continue to like GenM as an earnings recovery play.
“However, we are imputing a 5% discount to our previous sum-of-parts-driven target price of RM3.07 to arrive at a new price of RM2.90, as we downgrade the company’s environmental, social and governance ratings from a neutral three stars to two stars,” said the research house.
GenM reported on Wednesday that it would be injecting up to US$100mil into Empire Resorts Inc via its subsidiary, Genting ER II LLC (GERL).
The proposed injection involved subscribing to US$100mil worth of series M preferred stock of Empire by GenM’s subsidiary.
Empire, a Delaware corporation engaged in hospitality and gaming, operates businesses such as Resorts World Catskills (RWC), Resorts World Hudson Valley (RWHV) and mobile sports betting in New York.
“The proceeds from the Series M subscription will be utilised by Empire for working capital purposes and to fully repay an existing bank facility of US$58mil held by its holding company GERL.”
GenM said the proposed equity injection would enable Empire to further optimise its capital structure by reducing financial leverage and correspondingly interest expense at Empire and/or GERL.
“In addition, this will allow a quicker ramp up for RWHV and enable Empire to continue its focus on strengthening RWC’s operating performance to realise its full potential,” it said.
Meanwhile, Maybank Investment Bank (Maybank IB) Research said: “We do not look kindly on the deal as it is a related party transaction.
“That said, it does appear to us that room for more related party transactions involving Empire is narrowing.
“The proceeds will be used for working capital and to fully repay an existing bank facility of US$58mil.
“With this latest equity injection, GenM’s effective shareholding in Empire will rise to 90% from 76% and bring its total investment in Empire to US$724.4mil.”
Maybank IB Research emphasised that the acquisition is not subject to the approval of GenM’s minority shareholders.
It is raising its target price for the stock to RM3.03 from RM2.93 in light of the fewer related-party transactions.
