Can Genting Malaysia Bhd Survive The New Casino Duties?

On 2 November 2018, Malaysia’s Finance Minister Lim Guan Eng has announced a revision in annual casino license fees from RM 120 million to RM 150 million and a rise of 10% in casino duties from 25% to 35% starting on 1 January 2019.

Subsequently, Genting Malaysia Bhd has experienced a straight tumble in stock price from RM 5.55 to RM 3.58 presently, a 35.5% fall in just a few days.

Source: Yahoo! Finance

Here, I would like to answer two questions:

1. How to avoid buying shares of Genting Malaysia at RM 5.50 – RM 6.00 recorded throughout 2017 and early 2018?
2. Is this a good time to grab Genting Malaysia at RM 3.58?

For a start, my answer involves a study on Genting Malaysia’s fundamentals as I want to know whether it is of ‘investment-grade’. Then, I would use a handful of valuation tools to assess the stock price of Genting Malaysia, first at RM 5.50 which is before the Budget Announcement 2019, and second at RM 3.58 which is right after the Budget Announcement 2019.

Here, I would present my case by using the four matrices on Genting Malaysia.

#1: Business

Genting Malaysia is a leading destination resorts operator of the world, owning a handful of properties such as:

1. Resorts World Genting (RWG), Genting Highlands, Malaysia
2. Resorts World Kijal, Terengganu, Malaysia
3. Resorts World Langkawi, Langkawi Island, Malaysia
4. Resorts World Birmingham, the United Kingdom.
5. 40+ casinos across the United Kingdom.
6. Crockfords Cairo, Egypt
7. Resorts World New York City (RWNYC), the United States
8. Resorts World Bimini, the Bahamas  

Despite having a large portfolio of assets worldwide, Genting Malaysia made its profits mostly from RWG in Malaysia as contributions from its global properties remain insignificant. Here is a 5-Year summary of financial contributions arising from its assets based on its location.

Figures in RM Million

#2: Management

Genting Bhd is the largest shareholder of Genting Malaysia Bhd with having as much as 49.45% shareholdings of the company. Tan Sri Lim Kok Thay is a main indirect shareholder through his interest in Genting Bhd. He is appointed as its Chairman and Chief Executive. His son, Lim Keong Hui, is appointed as its Chief Information Officer. Thus, the Lim family remains at the helm of leadership for Genting Malaysia.

#3: Financial

Genting Malaysia has experienced a substantial jump in revenue from RM 5.33 billion in 2010 to RM 8.49 billion in 2011. This is due to the inclusion of RWNYC and casino operations in the United Kingdom.

Since then, Genting Malaysia had achieved a slight increase in revenue from RM 8.49 billion in 2011 to RM 9.33 billion in 2017. However, it failed to increase its profits as shareholders’ earnings had fallen from RM 1.60 billion in 2013 to RM 1.16 billion in 2017.

Source: Annual Reports of Genting Malaysia

In 2016, Genting Malaysia’s profits were inclusive of RM 1.27 billion in disposal gain of its interest in Genting Hong Kong Ltd (GENHK). I believe this gain should be excluded as it is one-off and non-recurring in nature. Thus, if we deduct RM 1.27 billion, Genting Malaysia’s true earnings would have been RM 1.61 billion, which is closer to its earnings reported throughout the 10-Year Period.

Its Return on Equity (ROE) had dropped from 11.97% in 2011 to 6.00% in 2017. It means Genting Malaysia has made RM 11.97 in annual earnings from every RM 100.00 in shareholders’ equity in 2011. Its amount of annual earnings had dropped to RM 6.00 in 2017.

#4: Valuation

In 2017, Genting Malaysia has reported RM 0.205 in Earnings Per Share (EPS), RM 3.41 in net assets (NA) a share and had paid out RM 0.09 in dividends per share (DPS).

Stock Price 1:

Let us start with RM 5.55, the stock price before Budget Announcement 2019.

At that price, its P/E Ratio, P/B Ratio, and Dividend Yields were 27.07, 1.63, and 1.62% respectively. P/E Ratio and P/B Ratio were close to their highest while its dividend yield was close to its lowest and below 3% in FD rates offered by most local banks across Malaysia.

That should answer Question 1. If an investor calculates a stock’s P/E Ratio, P/B Ratio, and Dividend Yields before investing into any stock, he would most likely have avoided the purchase of Genting Malaysia at RM 5.55 a share.

Stock Price 2:

Let us move onto RM 3.58, the stock price after Budget Announcement 2019.

At that price, its P/E Ratio, P/B Ratio, and Dividend Yields were 17.46, 1.05, and 2.51% respectively. P/E Ratio and P/B Ratio are now close to their lowest while its dividend yield was close to its highest. But, its dividend yields are still below 3% in FD rates offered by most local banks across Malaysia.

VIA’s Verdict

I learned that Genting Malaysia has failed to deliver sustainable profit growth to its shareholders. This has been reflected in relatively flat stock prices at RM 4.00 – 4.50 levels from the year 2013 to the year 2016. In 2017, stock prices had increased to RM 5.50 – RM 6.00 levels as investors could have used RM 2.88 billion in shareholders’ earnings or 50.9 sen in earnings per share (EPS) as their basis of evaluating Genting Malaysia.

That is a big mistake as they fail to omit RM 1.27 billion of one-off disposal gain of Genting Hong Kong Ltd in 2016. Without this omission, investors would have bought into Genting Malaysia, thinking that its P/E Ratio had fallen way below to 10 – 15 levels. Here is a lesson to all. It is best to review a stock’s financials in greater detail through studying its annual reports before making an investment decision. It helps to avoid potential hazards as displayed by Genting Malaysia.

Back to another question, ‘Should I buy Genting Malaysia Bhd at RM 3.58?’

First, Genting Malaysia is not for everyone, myself included as I invest primarily to earn dividend income. To receive a 2.51% dividend yield is unattractive to me as I can always open a FD account to earn 3% interest. Thus, ultimately, it really depends on your objectives for buying Genting Malaysia.

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