Although 1QFY20 was expected to be weak, the COVID-19 impact hit harder than expected which led to adjusted EBITDA for Leisure & Hospitality plunging by 41% QoQ. The only bright spot - plantations earnings were higher but it will not last as CPO price was declining going into 2QFY20. Going forth, the ongoing COVID-19 pandemic will be a major earnings disrupter. Nonetheless, we keep the stock as OP for its deep valuation at unchanged TP of RM4.90

1QFY20 results below expectation. At 22%/30% of house/street’s full-year FY20 estimates, 1QFY20 core profit of RM395.7m came below our expectation due to the worse-than-expected impact from COVID-19. Meanwhile, no dividend was declared during the quarter as it usually pays half-yearly dividend.

Business closures took a toll on earnings… 1QFY20 core profit fell 19% QoQ to RM395.7m with revenue contracting 23% over the quarter. The pandemic-led business closures thumped Leisure & Hospitality revenue by 26% as business volume shrunk. GENS’ earnings were badly hit with adjusted EBITDA plunging 48% as it was affected by the COVID-19 impact only in late-Jan while the 2-week MCO impact dragged GENM’s RWG earnings by 24%. On the bright side, GENP’s plantation posted a 9% hike in adjusted EBITDA on higher CPO and PK prices by 15% and 29%, respectively.

…and earnings fell almost by half YoY. On YoY comparison, 1QFY20 core profit plunged 46% from RM736.1m while revenue declined 26%. This was largely due to the same reason as mentioned above. GENS’ earnings plummeted 53% as revenue was thumped 36% while RWG saw adjusted EBITDA falling by 38%. Similarly, plantation benefited from higher CPO and PK prices by 33% and 24%, respectively that pushed its earnings higher by 5%.

Coming quarters challenging. As its group of casinos around the world are temporarily closed, the upcoming 2QFY20 is very likely to continue to post losses. Meanwhile, the group has started cost control measures to weather the depressed business environment. Meanwhile, 1QFY20 should already be the best performing quarter for GENP as CPO prices started to decline going into 2QFY20.

Keep OUTPERFORM for deep valuation. Post-1QFY20 results, we cut FY20E/FY21E CNP by 40%/8% to adjust for: (i) further impact from the COVID-19 on GENM and GENS, and (ii) lower GENP’s earnings on lower CPO prices to RM2,300-2,400/MT. Despite the expected weak earnings outlook, the stock still trades at 59% discount to its SoP valuation which is close to -4SD to 5-year mean (63% discount). As such, it is still offering deep value at this price and we keep our OUTPERFORM rating with unchanged target price of RM4.90, which is based on -2SD PBV to 5-year mean of 0.5x. Risk to our call is a prolonged COVID-19 pandemic which will continue to restrict travelling and affects its casino operations.

Source: Kenanga Research - 22 May 2020