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Nikkei Markets

Genting Malaysia's related-party deal clouds earnings prospects

Stock falls 15% on proposed purchase of Nasdaq-listed loss-making gaming company

Analysts said Genting Malaysia may be overpaying for the 49% stake in the Nasdaq-listed Empire Resorts.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Worries over short-term earnings erosion following a proposed acquisition of a loss-making gaming company in New York battered Genting Malaysia's shares, prompting at least three brokerages to cut their views, while others await further clarity on the deal.

Shares of Genting Malaysia plunged as much as 15% on the Kuala Lumpur stock exchange Wednesday after the company announced the $128.6 million transaction. The stock was last down 11.4% at 3.20 ringgit compared to the benchmark FBM KLCI's 0.4% decline.

Analysts, who are chary that the deal could dent future earnings of the company, said Genting Malaysia may be overpaying for the 49% stake in the Nasdaq-listed Empire Resorts.

"We are negative on the news in the short term as the acquisition price implies a premium to book value despite Empire still recording losses," said Hong Leong Investment Bank's Analyst Andrew Lim Ken-Wern, who cut the stock's rating to Hold and slashed the target price nearly 10% to 3.79 ringgit.

If Empire's loss in 2020 is similar to that of 2018, Genting Malaysia's net profit could take a hit to the tune of 283 million ringgit, or about 23% of the projected earnings forecast, said Lim.

Late Tuesday, Genting Malaysia announced that it has signed a term sheet to buy the stake in Empire from Kien Huat Realty, controlled by Genting's founding family, making the deal a related-party transaction. Kien Huat also owns a 42% stake in Genting, which in turn owns 49% in Genting Malaysia.

Genting Malaysia and Kien Huat will also offer to acquire the remaining Empire shares not held by them for $9.74 per share. A joint venture between Genting Malaysia and Kien Huat will then be formed to hold the stake in Empire that have been posting net losses since 2015.

In the past, investors have typically punished the company for its related-party transactions.

In 2010, a proposal to acquire UK operations from Genting Singapore for 340 million pound ($413.41 million) sent the stock 10% lower. In 2008, the stock fell 17% after it announced purchase of Walker Digital Gaming for $69 million from the Lim family.

"This time, minority shareholders' reaction, given their concerns of a potentially value-destructive deal, may enforce a long period of subpar valuations which underrates the group's strong operations in Asia," said UOB Kay Hian's Analyst Vincent Khoo.

On its part, Genting Malaysia said the deal would "better position the Resorts World brand in the north-eastern U.S. gaming market through more effective cross marketing with Resorts World Casino New York City."

Further, there would also be "revenue and cost synergies" from the arrangement and allow Genting Malaysia to participate in Empire's future growth opportunities in the Orange County Opportunity, the company added.

The proposed deal signals that the Lim family is optimistic on Empire's outlook, Yin Shao Yang, analyst at Maybank Investment Bank. "We maintain our estimates pending more details from the 2Q19 earnings call," said Yin, who kept Hold rating on the stock with 3.80-ringgit target price.

--Jason Ng

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