Post Budget 2020 announcement, we believe sentiment on Genting Malaysia Bhd (GenM) should recover, especially as concerns about potential gaming tax hikes have now been lifted.
Empire Resorts expects to be earnings before interest, taxes, depreciation and amortisation (Ebitda)-positive by financial year 2020 (FY20), ahead of the street/our estimates. We have not imputed further earnings growth potential from legalisation of online sports betting. Attention instead should be given to Resorts World Genting (RWG), in anticipation of Visit Malaysia Year 2020 (VMY2020) and the opening of its outdoor theme park, possibly by the third quarter of 2020 if not earlier.
While we did not foresee any gaming tax hike in the first place, the street’s concerns had been present since the unexpected steep gaming tax hike in Budget 2019.
The management of Empire Resorts published its financial projections recently. The optimism is mainly driven by strong revenue growth assumptions (22% and 15% growth for FY19 and FY20 respectively) given the ramp-up in its gaming business.
While the acquisition of Empire Resorts has raised some environmental, social and governance (ESG) concerns, investors should look beyond this related party transaction, which is ultimately a non-core joint-venture asset. Instead, the focus should be on its core business of RWG which contributes about 80% of group Ebitda.
RWG has repeatedly shown its capability to cushion gaming tax hike impact and beat street estimates over the past two quarters. Moving forward, its strategy to focus on the premium mass market over high rollers will continue to mitigate the tax hike impact. VMY2020 and the opening of its outdoor theme park should be earnings growth drivers ahead.