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KUALA LUMPUR (September 14): The word “negative” better describes analyst sentiment today after Genting Malaysia Bhd (GenM) announced on Friday (September 11) that its indirect wholly-owned subsidiary Genting ER II LLC will be subscribe for an additional $ 150. million (approximately RM625 million) of preferred shares in Empire Resorts Inc., GenM’s associate company, based in the United States by 49%,
Analysts at CGS-CIMB Securities Sdn Bhd said today that the subscription of Empire preferred shares is a negative development for GenM because Empire, which runs the Resorts World Catskills (RWC) casino in New York, is expected to make losses over the next few five years.
“While we understand the rationale for the exercise, it is nonetheless a negative development for GENM, as we forecast Empire to generate losses over the next five years (in line with Empire’s projections in the amendment to its proxy statement, filed on After Upon completion, GENM’s share of Empire’s losses will increase from 49% to 57%, which will reduce our main EPS for fiscal year 21-22F (forecast for GenM) by 2.9-5.5% ”, CGS analysts- CIMB, Foong Choong Chen and Sherman Lam Hsien Jin wrote in a note.
Hong Leong Investment Bank Bhd (HLIB) analyst Andrew Lim Ken-Wern said HLIB is slightly negative on the short-term impact of the news on GenM due to the need for more funding required by Empire.
“However, the amount to be injected would increase GenM’s net leverage to 0.37x (from 0.34x as of 2QFY20), which is still manageable. We are not entirely surprised by this news, as Empire had previously disclosed the need for injection. capital along with (their) debt restructuring, which has now been further affected by Covid-19, ”Lim said.
On Friday, GenM said in a Bursa Malaysia filing that proceeds from the $ 150 million Series L preferred stock subscription will be used by Empire for financing and working capital purposes.
On March 19, 2020, GENM had also announced a subscription agreement for up to $ 40 million of Empire Series G preferred shares, according to Friday’s filing.
“The US gaming industry had been badly affected by the Covid-19 pandemic. In March 2020, US authorities ordered all gaming complex operations to be suspended in an effort For slowing the spread of the virus amid the worsening Covid-19 situation, Empire had temporarily shut down all of its gaming operations, including RWC. On September 9, 2020, RWC resumed operations in accordance with operational protocols. established by the US authorities.
“The disruption of Empire’s operations caused by the pandemic resulted in a significant adverse impact on its liquidity. Empire has sought to mitigate the liquidity impact of closing its operations through aggressive cost control measures, including reducing costs. of employees through leave and deferral of – essential capital expenditures.
“The capital injection (Series L) allows Empire to have funds for working capital for the resumption of operations. In addition, Empire will require funds to meet its short-term debt obligations within the next six months. Empire will also be able to test their business plan and continue with their long-term refinancing plans, ”GenM said.
Today, CGS-CIMB analysts said that while further capital injections into Empire cannot be ruled out, additional fundraising in the short term can be done through the debt market as Empire is working on its offering. bond.
Foong and Lam said CGS-CIMB has lowered the GenM share price target (TP) to RM2.70 from RM2.80 with an unchanged “add” option after considering the $ 150 million investment in the shares. Empire preferred stock and apply a 15% discount. to the revalued net asset value of GenM (RNAV).
“The full recovery of casino volumes after Covid-19 is a potential catalyst for requalification,” they said.
HLIB, however, maintained its GenM TP of RM2.43 and “expected” call for the stock.
“We expect the share price to remain potentially low in the short term given the potential impact of this news coupled with the overall impact of Covid-19 on its overall operations,” Lim said.
At the Bursa break at 12:30 pm today, GenM’s share price settled at four sen or 1.81% at RM2.17 for a market capitalization of RM12.27 billion.
The stock saw some 10 million shares traded.
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