PETALING JAYA: Genting Malaysia Bhd (GenM) and Genting Bhd emerged as the top losers on the local bourse today after news of GenM acquiring loss-making Empire Resorts Inc for RM538.8 million.
Both stocks came under heavy selling pressure after the opening bell, with GenM slumping as much as 14.7% to a low of RM3.08 before closing 43 sen or 11.9% lower at RM3.18, wiping off about RM2.55 billion in its market capitalisation with 256.37 million shares traded.
Genting Bhd’s share price sank 47 sen or 7.1% to close at RM6.18 on 23.64 million shares done, slashing some RM1.82 billion off its market capitalisation.
In total, the two stocks lost RM4.38 billion in market capitalisation today.
Hong Leong Research said it is negative on the news in the short term as the acquisition price implies a premium to the book value (1.5 times 2018 price-to-book value) despite Empire still recording losses.
It also downgraded GenM to “hold” with a lower target price of RM3.79 from RM4.21 to reflect the risk of short-term earnings erosion associated with the loss-making acquisition.
Assuming Empire’s FY20 registers a loss similar to that of FY18, Hong Leong said the impact to GenM’s bottom line will be about RM283 million, which is about 23% of its FY20 earnings forecast.
However, it maintained the forecasts pending further clarity on the earnings outlook.
Empire incurred a loss of US$138 million in FY18, mainly due to the high start-up expenses incurred in the commencement of Resorts World Catskills (RWC). It posted losses of US$25 million to US$46 million in the preceding three years.
GenM has entered into a term sheet with Tan Sri Lim Kok Thay’s Kien Huat Realty Ltd (KH) to acquire a 46% stake in Empire for RM538.8 million.
Lim is the chairman and CEO of the Genting group.
GenM also will submit a preliminary non-binding proposal to acquire the outstanding 16% stake in Empire unaffiliated with KH at RM325.7 million. KH currently owns 84% equity interest in Empire.
GenM will then enter into a merger agreement with KH and contribute all Empire shares held into a proposed joint venture with GenM and KH holding 49% and 51% respectively.
Meanwhile, PublicInvest Research is maintaining its earnings forecasts and neutral call on GenM pending more details on the proposed acquisition.
“However, we feel that market may view a related party transaction negatively and we see risk of share price weakness following this announcement.”
The research house believes funding will not be an issue for GenM as it will be supported by its internally generated funds.
“On face value however, we are less enthused over the parent company’s tapping of GenM’s cash reserves on non-earnings accretive ventures.”
Empire is listed on Nasdaq and operates RWC, which is in Sullivan County, New York.
RWC started operations in February 2018 and features a 332 all-suite hotel, 1,600 slot machines and over 150 live table games. It also owns Monticello Casino and Raceway in New York.
Source: The Sun Daily