Genm acquire 46% of Empire Resorts with RM 540 millions and its Impact on Genm Financial

• Genm is acquiring 46% of Empire Resort for RM 540 millions. 

Financial Highlights for Empire Resort in 2018 & 2019

• According to Bloomberg, Empire Resort losses USD 140 millions (RM 590 millions) in year 2018 which is the highest over the past 4 years. 

• Empire Resort losses USD 36 millions (RM 150 millions) in Q2 2019. Assuming Empire Resort incurred the same losses in Q3 & Q4 2019, that would be a loss of USD144 millions (RM 600 millions). 
• Genm acquire 46%, meaning RM 276 millions of the losses will impact on Genm result. 

Financial Highlights for Genm in 2019

• Genm generates profit after tax of RM 253 millions in Q1 2019. Assuming if Genm consistently generates the same amount over the remaining quarters, profit for 2019 would be RM 1012 millions. 
• However do take note that there is a one off pre opening expenses of RM 210 millions and one off gain on disposal of RM 123 millions in Q1 2019. I do not expect this expenses to appear in Q2 2019, therefore, Q2 2019 result are expected to be better. 
• If exclude the pre opening expenses and one off gain on disposal, Genm profit after tax should be RM 369 millions. Therefore, a full year estimation would be RM 1476 millions.

Impact of Empire Resorts losses on Genm Financials

Scenario 1 (pessimistic) 

• RM 1012 millions - RM 276 millions = RM 736 millions
• RM 736,000,000 / 5,659,071,000 shares = EPS 13 sen for year 2019

Scenario 2 (optimistic)

• RM 1476 millions - RM 276 millions = RM 1200 millions
• RM 1,200,000,000 / 5,659,071,000 shares = EPS 21 sen for year 2019

Valuation

• At RM 3.12 a share, PE of Genm is 14.8 assuming the EPS is 21 sen.
• At RM 3.12 a share, PE of Genm is 24 assuming the EPS is 13 sen.
• A fair PE of Genm should be around 15 - 17. 

Key Things to Ponder

• Will the reopening of theme park in end 2020 or early 2021 cushion the additional losses contributed by Empire Resort?
• Will the voluntary bankruptcy debts restructuring under chapter 11 help Empire Resort to reduce its debts hence reduce its losses? 
• The core value of Genm is that it is the only casino in Malaysia and Genting remain as one of the most popular tourist destination/short get away for Malaysian due to its weather and portrait as an all rounder to entertain family from adults to kids. Has the core value of Genm being broken at this stage? 
• More over, Genm has been consistently generating a positive cash flow from operating amounting RM 1500 millions to RM 2000 millions every year . How massive is the impact of RM 300 millions of losses from Empire resort? RM 300 / RM 1500 = 20%. 
• Share Price of Genm before the news announcement is RM 3.61. RM 3.61 discounted by 20% would be RM 2.88. Therefore, RM 2.90 should serve as a very strong support fundamentally.