Buy | Target price: MYR4.05

Our top pick in the casino sector. Although Genting Malaysia (GENM)’s share price has risen 12% since 27 Sep 2012, valuations are still below historical averages. We think this is unjustified given the defensive nature of earnings at Resorts World Genting (RWG) and Resorts World New York (RWNY). Also, RWG’s new hotel will likely see additional gaming capacity. Florida and New York, markets GENM is keen to enter, will re-deliberate the liberalisation of their casino industries in six months’ time. Maintain BUY; MYR4.05 DCF-based TP.

Still cheap. Since GENM’s share price hit a 30-day low of MYR3.35 on 26 Sep 2012, it has recovered by 12%, as fears of a hike in casino taxes (currently 25% of gross gaming revenue) during the 2013 National Budget did not materialise. Even so, current valuations of 12.2x PER and 1.5x P/BV in FY13 are still below their 14-year one-year forward averages of 13.2x and 1.9x respectively (Chart 1 and 2).

Little downside risk to earnings. RWG’s earnings have historically been recession resistant (Chart 3) due to a high number of visitors/ table (Table 1). Also, RWNY’s average daily win/unit has been climbing steadily above our assumption of USD375 (Chart 4), as more highyielding electronic table games are deployed. We estimate that RWG and RWNY will contribute >90% to group earnings going forward.

Upside potential from extra GFA. GENM will invest MYR300m over the next 2½-3 years to construct a 700-room hotel at RWG. We understand that historically, new hotels at RWG have come with new gaming floor area (GFA). This new hotel should be no different. The new GFA will likely cater more to Singaporean visitors, deterred from gambling at home due to a much stricter Casino Control Act.

Maintain BUY call and MYR4.05 TP. At MYR3.78, investors who buy GENM will get its investments, properties and cash for free. At current levels, its share price offers an excellent BUYing opportunity, in our view. Its net cash pile, which we estimate will burgeon to MYR1.8b by year-end, will also enable it to continue its ventures into Florida and New York. Both states are expected to re-deliberate the liberalisation of their casino industries in 1Q13.

Source: Maybank Research - 5 Oct 2012