Disclaimer: The article represents mine and my view/opinion alone and does not represent any other companies’ or the company I am working for. This is an independent project for informational/research purposes and I do not have any trading position in the company below.

Hi all, just wanted to provide an update on Genting Malaysia Berhad (“GMB”). You can find my previous update here and my main research piece here. GMB’s 2Q result is out and this update will focus on i) Revenue, EBITDA, Net Inome and Operational cash flow numbers; ii) Leverage levels and debt service ; iii) Recent developments in GMB and iv) Share Price performance and Valuation call. For those not interested in reading the whole update, you can read the executive summary below.

Executive Summary (BUY at TP of RM6..39)

Maintaining BUY call at TP of RM6.39 but I might be revising my valuation and analysis if 3Q number is poor like 2Q 2017.

Main points to note in this update:

1. GMB in Q2 2017 has had a bad quarter in terms of maintaining its operational margins. Revenue growth has been decent but is by no means excellent.
2. GMB’s leverage (Debt/ (Debt + Equity)) has gone up in 2Q 2017 to 27.1% and is higher than all its previous years. Debt Service capability (Interest Expense/EBIT) has deteriorated also at 13% currently, higher than previous years.
3. News on GMB’s parent company’s Genting Berhad ongoing lawsuit between the grandson of Lim Goh Tong, Benjamin Lim Keong Hoe and his uncles, Lim Kok Thay and Lim Chee Wah has been dominating headlines recently are a cause of concern.
4. GMB’s share price performance has been very poor, mainly due to the poor 2Q 2017 numbers and the ongoing family tussle in Genting Berhad

Operational Metrics Analysis (Revenue, EBITDA, Net Income and Op Cash Flows)*

* I have removed the non-op income portion from the income statement to be consistent with my earlier main report and updates. Please see the main document for an explanation on why I do it.

GMB in Q2 2017 has had a bad quarter in terms of maintaining its operational margins. Revenue growth has been decent but is by no means excellent.

Q2 2017 revenue grew by 2.6% compared to last year, but EBITDA and Net income declined by -19.3% and -56.7% respectively. Net income margin has been particularly low at 8.2% compared to 2Q 2016 (19.4%) and 1Q 2017 at 11.9%. The decline in net income margin is due to i) higher cost of goods sold in relative to revenue at 66% compared to 2Q 2016 of 62% ; ii) higher depreciation charges due to commencement of some facilities in the Genting Integrated Tourism Plan; iii) impairment losses of RM36.8m from Bimini operations, and iv) higher taxation at RM73m implying a 30% implied tax rate where 2Q 2016 implied tax rate is only 9%. The operational cash flow is 25.7% lower when compared to 2Q 2016.

When comparing 2Q 2017 growth and margins, 2Q 2017 numbers are slightly lower than the average from 2013 to 2016. EBITDA and Net income margins are at 21.5% and 8.2% compared to 2013-2016 averages of 22.0% and 10.0%. Looking at the overall trend, margins was on a downward trend from 2013 to 2015, and recovered in 2016. The 2Q 2017 narrative of lower margins seem to indicate that there is a downside risk to 2017, but it is worth noting that 1Q 2017 margins were in line with 2013-2016 averages. We have to see how 3Q 2017 numbers will be. If there is a persistent downward trend in 3Q, then I will be revising the valuations downwards. For now, it is too early to tell how 2017 numbers will be.

Leverage Levels and Debt Service Capability

GMB’s leverage (Debt/ (Debt + Equity)) has gone up in 2Q 2017 to 27.1% and is higher than all its previous years. Debt Service capability (Interest Expense/EBIT) has deteriorated also at 13% currently, higher than previous years.

Q2 2017 Debt/ (Debt + Equity) ratio has increased to 27.1% compared to 2013-2016 average of 14.1%. Long term debt has increased by RM2.97bn from end 2016 to 2Q 2017, and this is mainly due to the issuance of RM2.6bn of medium term notes to fund the working capital and funding of the development of Genting Integrated Tourism Plan on 31 March 2017 (kinda fishy how they time it right after 1Q 2017, cause I didn’t pick this up from its 1Q 2017 report). Even though leverage has increased, leverage ratio of 27% does not seem high in the larger context.

GMB’s interest expense/EBIT coverage ratio remained flat at 13% for 2Q 2017 compared to 2016, which is a good sign as it has been on an upward trend from the year 2013. But this is expected to increase as GMB recently issued a RM2.6bn of medium term notes for the GITP project, and the GITP projects are not expected to contribute to revenue anytime soon.

Notable News and Development on GMB

News on GMB’s parent company’s Genting Berhad ongoing lawsuit between the grandson of Lim Goh Tong, Benjamin Lim Keong Hoe and his uncles, Lim Kok Thay and Lim Chee Wah has been dominating headlines recently are a cause of concern. The news article here from FMT, details the general power of attorney given to Lim Kok Thay and Lim Chee Wah given by Lee Kim Hua (wife of Lim Goh Tong) was given when Kim Hua was not of sound mind and that the use of thumb print was suspicious. The ongoing turmoil within the family runned business of Genting Berhad will impact Genting Malaysia Berhad in terms of Board and Management effectiveness, if the distraction in its parent company spills over to its subsidiary companies.

Share Price Performance and Valuation

GMB’s share price performance has been very poor, mainly due to the poor 2Q 2017 numbers and the ongoing family tussle in Genting Berhad. 2 months share price return is at -10.8% and is -15.3% when my coverage started. So far, it looks like I am way off and I will probably need to relook at my analysis if it deteriorates further (my KLK research also indicated I was very wrong, sooooo ….. ok). Average share price was at RM5.50, which is significantly lower than before August. I am still maintaining my valuation call at RM6.39, pending 3Q 2017 numbers but like KLK, it seems that I have to reduce my valuation. This is still higher than the average analyst TP of RM5.59.