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Genting Malaysia dealt a bad hand again

Wong Ee Lin
Wong Ee Lin12/3/2018 07:30 AM GMT+08  • 5 min read
Genting Malaysia dealt a bad hand again
SINGAPORE (Dec 3): Another hammer has hit hard on the share prices of Genting Malaysia and its parent Genting, as the casino operator will not be able to complete its 20th Century Fox World Theme Park project, in which it has invested US$750 million ($1 b
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SINGAPORE (Dec 3): Another hammer has hit hard on the share prices of Genting Malaysia and its parent Genting, as the casino operator will not be able to complete its 20th Century Fox World Theme Park project, in which it has invested US$750 million ($1 billion).

News broke in Los Angeles, US on Nov 26 that Genting Malaysia had filed a lawsuit against Twenty-First Century Fox group of companies (Fox) and its soon-to-be owner Walt Disney Co for terminating the licensing agreement with Genting Malaysia for Fox intellectual property (IP) rights. The lawsuit accused the two US companies of abandoning a licensing contract tied to the planned construction of the Fox-branded theme park in Genting Highlands.

The termination of agreement sparked another wave of strong selling on Genting Malaysia, wiping out RM3.39 billion ($1.1 billion) in market capitalisation on Nov 27 as investors were getting even more concerned over its earnings prospects shortly after the government’s move to raise gaming duties by 10%, to 35%, on collected revenue.

Genting Malaysia shed 16 sen, or 5.55%, to close at RM2.84 on Nov 29 — the lowest in seven years. Year to date, the once investors’ darling has tumbled 76.6% from the peak of RM5.42. Some RM13.69 billion market capitalisation has evaporated from Genting Malaysia YTD.

The agreement with Fox, which was signed in 2013, was meant for the development of the world’s first Fox-branded theme park. This new theme park was scheduled to open next year and expected to be an attraction that would help draw more visitors to the hilltop casino resorts in the future.

Following the announcement of the lawsuit, Genting Malaysia encountered a second round of earnings downgrades last month.

Bloomberg has reported that Genting Malaysia is seeking more than US$1 billion in damages, according to a complaint filed on Nov 26 in federal court in Los Angeles. The reason for Fox’s termination of the deal is that Disney does not want to be associated with the gaming business, Genting Malaysia cites in the complaint.

Unlike Disney, which owns its parks in part or whole, Genting Malaysia would own and finance the park completely, with Fox getting a cut of the revenue from retail and F&B. Disney is in the midst of taking over Twenty-First Century Fox for US$71.3 billion.

Tushar Mohata, Nomura head of Malaysia equity research, says the news coming so soon after the 10% gaming tax hike in Malaysia further jeopardises the earnings trajectory of Genting Malaysia.

In view of the anticipated delays, Tushar, in a note dated Nov 27, cut the visitation forecasts by 6% for FY2019 ending Dec 31, 2019 and FY2020; cut its theme park revenues by 65% each, resulting in earnings cuts of 20% each over FY2019/20; and also maintained a “reduce” rating with a lower price target of RM3.

“Going through the complaint document reveals that it appears the theme park’s construction has been mired in dispute for years now — possibly one of the reasons for multiple delays over the years,” he said, adding that the document suggests that it will take time for these issues to work themselves out through legal due process or settlement.

Noting that while a theme park without Fox IP is possible in a worst-case scenario, Tushar says it is not necessarily a positive, given the US$750 million sunk into the project so far. “We will most probably not hear any developments on the theme park until the lawsuit is resolved,” he adds.

Disney and Fox have, however, described Genting Malaysia’s respective claims against them as “without merit”, according to a Reuters report on Nov 27 that said the US companies had rejected the claims. The report also cited the complaint as saying that Fox issued a default notice in a manner consistent with Disney’s wanting to “kill the deal”.

Fox has rejected that allegation. “The allegation that Disney, rather than Fox, finally decided to declare a default is simply made up,” Reuters reported, citing a spokesman.

Hong Leong Investment Bank Research analyst Lee Meng Horng notes that as the non-gaming revenue is estimated to account for 15% to 20% of Resorts World Genting’s total revenue, or 10% to 15% of Genting Malaysia’s total revenue, it is believed that the earnings impact will be less significant than that of the hike in gaming tax.

Lee, in a note dated Nov 27, highlights that the group had been banking on the outdoor theme park as a catalyst to further boost visitor arrivals (30 million by 2020), which would enhance casino visitations and overall spending for FY2019 to FY2020.

Lee believes the theme park will eventually roll out despite the ongoing tussle with Disney, as Genting Malaysia is still the asset owner and Disney is only the licensor.

Meanwhile, TA Securities analyst Tan Kam Meng says he has not revised Genting Malaysia’s earnings pending further guidance from the group about its plans for the theme park. “Nothing much we can say about the earnings impact because we still do not know what the management is going to do with the theme park. The question now is... whether Genting Malaysia will operate the theme park itself or invite other operators to run it,” says Tan. — The Edge Financial Daily

Wong Ee Lin is a writer with The Edge Malaysia

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