THE EDGE SINGAPORE - Although the situation surrounding the Covid-19 pandemic might have improved in several countries, but things are not completely back to normal yet.

For one, cross-border travels are still prohibited or very tightly managed, such that leisure travels are still not allowed. And with the lack of tourists, tourism-related businesses everywhere are suffering.

This is evident in gaming and theme park conglomerate, Genting Bhd (GENT), which owns Genting Hong Kong (GENHK) and Genting Singapore (GENS). On a group level, GENT had to reduce salaries and cut thousands of jobs just to stay afloat.

But cost cutting measures were not enough. On Aug 20, GENT chairman Lim Kok Thay, in a desperate attempt had pledged nearly his entire stake in embattled cruise operator GENHK as collateral for loans, raising the risk of a margin call after the stock plunged 38% on the day of announcement.

Despite this shocking announcement which caused GENT’s shares to tumble the day after, UOB Kay Hian is keeping its “overweight” call on the regional gaming sector with a focus on Genting and its companies. It also notes that the gaming stocks can only stage strong recoveries when a vaccine is introduced or if the containment of the virus is successful.

The record selloff came after the company said it suspended all payments to creditors in a bid to maintain its critical services. The stock has now lost almost two-thirds of its value since December, and that’s only part of Lim’s sinking empire amid the Covid-19 crisis.

Lim has been pledging more of his holdings as the shares have plunged. Almost all of his 76% stake in GENHK is now committed -- or 6 billion shares, according to an end- July filing -- up from 5.5 billion shares in April. As of March, he had pledged 550 million of his GENT shares -- or 32% of his holdings -- up from 70 million a year earlier, according to the company’s annual reports.

Lim’s fortune is now valued at about US$700 million ($956.1 million) excluding pledged shares, down from US$1.5 billion at the beginning of the year.

See: Malaysian tycoon behind Genting Hong Kong puts fortune on the line, raising risk of a margin call

In an Aug 21 report, lead analyst Vincent Khoo remains rather bullish on Genting and its sister companies. He has kept “buy” calls for GENT and Genting Malaysia (GENM) with target prices of RM5.44 and RM3.10, and recommends investors to “buy” on share price weakness.

He however has a “hold” recommendation on GENS with a 69 cents target price. GENHK remains unrated.

“GENHK’s abrupt temporary payment suspension to all its financial creditors has stoked up fears that its sister companies would be forced to bail out GENHK. Nevertheless, it is more likely to be a prelude to GENHK’s restructuring of its US$3.4b debt, coupled with additional fund raising within the financial community,” says Khoo.

GENHK has already earlier issued a profit warning and expects 1H20 unaudited losses to be not less than US$600 million, as compared with 1H19 net losses of US$55.2 million. This is mainly due to suspension of its casino cruise ships, shipyard operations and also other businesses such as Resorts World Manila and Zouk nightclub in Singapore on the devastating impact of the Covid-19 pandemic.

Khoo believes that GENHK can swim its way out of the deep end. “We expect GENHK to reach a pragmatic agreement with its creditors and to also secure additional financing to stay afloat in the interim period, until a vaccine for the Covid-19 virus is discovered, or until the pandemic is reasonably contained to allow GENHK to fully resume its cruise operations. We envision that GENHK would be able to eventually issue fresh debt and/or equity, albeit at high interest costs and significant equity discounts, just like the US peers which have done so in 2Q20,” he says.

With that, GENHK’s sister listcos are not  envisaged to need to help with any bailing out and creditors of the Lim family’s pledged GENHK shares do not have alternative recourse. GENHK’s debt obligations are ring-fenced to only its assets, and the current default does not trigger any cross defaults on GENT, GENM and GENS. However, GENS has minor direct dealings with GENHK which leases office space from GENS.

The analyst also believes a bailout is highly unlikely as a bailout of this magnitude would most likely require approvals of the respective listcos’ minority shareholders, who would most likely reject the deal.

In terms of share margin, while the Lim family has already pledged most of its direct 76% controlling stake in GENHK, creditors have no recourse beyond the GENHK share collateral in the case of a margin call default.

“Rather, to help strengthen the Lim family’s cash flows, we continue to envision that financially healthier operating subsidiaries GENM and GENS will cascade up their surplus reserves as dividends, and for GENT to distribute relatively healthy dividends to shareholders (including the Lim family),” Khoo adds.

As at 12.40pm, shares in GENT are trading at RM3.55, down 41.5% YTD; GENM shares are trading at RM2.22, 32.9% lower YTD; shares in GENS are trading at 70 cents, 24.7% down YTD; shares in GENHK are trading 54.6% lower YTD at 35 HK cents.

 

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