PETALING JAYA: Despite Genting Malaysia Bhd’s (GenM) share price having plunged 15% since the acquisition of the controversial Empire Resorts Inc, Kenanga Research believes that the deal will suppress the stock sentiment further, hence downgrading it to “market perform”.
Citing that GenM’s valuation is still not attractive enough, it has revised downward GenM’s target price to RM3.20 from RM4.30.
This comes after GenM responded to a query on Bursa Malaysia, stating that the purchase of Empire shares from Kien Huat Realty III Ltd (KH) and a 51:49 joint venture between KH and GenM to privatise Empire should be able to resolve Empire’s present liquidity challenges.
The research house said although Empire is unlikely to be liquidated, GenM is paying a hefty price for the related party transaction acquisition, which saw its market capitalisation plunge by RM3.2 billion.
“In addition, the proposed acquisition is not merely on equity stake but involves capital injection for debt restructuring.”
Empire has said it may pursue a voluntary chapter 11 bankruptcy proceeding, if measures such as the joint venture privatisation bid are unsuccessful.
Under the deal, Kenanga has estimated that GenM will pay US$128.6 million (RM538.8 million) for 13.2 million Empire shares at US$9.74 per share and eventually, the joint venture will have to pay about US$53.6 million to take the company private.
“In all, this deal is viewed as vital to Empire which needs fresh capital injection to restructure its borrowings given its poor cash flow generating ability being loss-making for the past 20 years.
The research house highlighted Empire’s latest 1H19 results showed a net loss of US$73.7 million against a net loss of US$155.4 million in FY18 along with a total payment commitment of US$112 million over the next 12 months or US$827 million over the next five years.
“Therefore, GenM’s commitment is not capped at only circa RM538.8 million.”
Based on Empire’s latest filing, its biggest outstanding debt is a US$520 million (RM2.17 billion) building term loans for the development of Resorts World Catskills which commenced operations in February 2018.
As of Q2 19, Empire has an outstanding term loan of US$504.7 million or US$688.5 million including interest payment for the next five years.
Assuming GenM has to bear 49% of this term loans, Kenanga said it may need to inject US$247 million for the debt restructuring.
The research house calculated that it will cost RM1.69 billion for GenM to own a 49% stake in Empire, eventually which includes the initial acquisition cost and the privatisation cost.
It said that GenM has no problems financing the acquisition given its cash position of RM5.56 billion as at Q1’19.
“However, the negative earnings impact in the near term could be significant as the 49% stake in US$155.4 million net loss, which accounts to RM320 million, 17% of GenM’s FY18 core earnings,” it said.