October 5, 2016, Wednesday
KUCHING: Genting Malaysia Bhd (Genting Malaysia) latest move in disposing of the group’s entire 16.9 per cent stake in Genting Hong Kong Limited (Genting Hong Kong) has garnered mixed reactions from analysts.
In a filing on Bursa Malaysia, Genting Malaysia announced the group’s disposal of 1.43 billion ordinary shares in Genting Hong Kong, representing 16.87 per cent of the then total issued and paid-up share capital of Genting Hong Kong, for a total cash consideration of US$415 million or the equivalent of approximately RM1.71 billion.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), although this is a related party transaction (RPT), it is a positive move as the non-core stake in Genting Hong Kong has not much impact on Genting Malaysia while the disposal proceeds can be better applied for the latter’s expansion program, such as the RM10.38 billion Genting Integrated Tourism Plan (GITP) development.
“In fact, Genting Hong Kong used to be a wildcard and impacted Genting Malaysia badly in which the latter owned more than 20 per cent stake, which qualified for equity accounting.
“However, since Genting Malaysia reduced its stake to below 20 per cent in 2007, the impact from Genting Hong Kong became immaterial,” Kenanga Research said.
While the announcement did not disclose the disposal gain/loss of this divestment, Kenanga Research believed the impact was small given that the Genting group always reported mark-to-market value on their investments in listed companies on a quarterly basis.
However, the research arm made adjustments to its earnings model to reflect this disposal as the proceeds will affect interest income while it has also made upward adjustment on Genting UK and the North America earnings following their strong numbers in the first half of 2016 (1H16).
In all, the research arm upgraded financial year 2016 estimate (FY16E)/FY17E earnings by eight per cent/six per cent.
In contrast, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) was neutral on this disposal as it is a RPT and the disposal price of US$0.29 is at the minimum price allowed under the mandate (in spite at a 8.2 per cent premium to five days volume weighted average market price (VWAMP)) compared to the average purchase cost of US$0.42.
HLIB Research noted that this disposal allows Genting Malaysia to monetise the group’s loss-making investment in Genting Hong Kong which provides minimal income yield (total dividend received RM106 million versus total investment of approximately RM4.12 billion since 1998)!!!!!!!!!!!!.
“The proceeds of RM1.71 billion can be put into better use for its working capital and capex for its expansions, while maintaining net cash position,” the research arm said.
The research arm further noted that having classified the investment as assets held for sale since year 2015 with a carrying value of RM1.74 billion, there will be a one-off accounting gain on disposal of circa RM1.23 billion after the reclassification of reserves (previous year revaluation and foreign exchanges gain/losses).
On another note, HLIB Research said that potential loss of dividend income from Genting Hong Kong is rather negligible given the inconsistency of dividend payment and the quantum.
Dividend received in FY15 was about RM56 million, which was circa 3.8 per cent of the research arm’s FY16 forecasted profit after tax and minority interest (PATAMI).
“This level of yield can be easily recouped from interest bearing deposit or interest savings from the proceeds,” it said.
Forecast-wise, HLIB Research imputed the effect of the disposal into its balance sheet ignoring the one-off gain/loss/reversal arising from the transaction with no change in earnings.
“We opine that growth in 2017 on higher visitors from the amenities under GITP has been largely priced in, impending for more exciting catalysts in 2018.
“Meanwhile, we are still wary on the uncertain overseas operations, the potential risks in execution and the high cost involved,” the research arm said.