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PETALING JAYA: Genting Malaysia Bhd’s (GENM) acquisition of the Equanimity super yacht for US$126 million (RM513.9 million) is a negative surprise for analysts, who are not convinced by the group’s explanation that the acquisition could strengthen its competitive edge.
CGS-CIMB Research said GENM does not have experience managing super yacht and cruise liners.
“We view this news negatively as GENM is not in the superyacht and cruise liner business,” it said in a research note today.
GENM’s share price retreated today to close 3 sen or 0.9% lower at RM3.25 on 5.61 million shares done.
Genting Group’s cruise liner business is managed by Genting Hong Kong. GENM claimed that the acquisition of Equanimity will allow the group to differentiate itself from its competitors and provide a unique and competitive edge for its premium customer business.
“While we agree this could help to boost the VIP business, the impact may not be material considering that the super yacht can only fit 50+ passengers, which includes 31 crew members. Meanwhile, GENM would have to incur additional costs in the form of higher depreciation charges, maintenance and upkeep cost and interest income loss,” said PublicInvest Research.
The original cost of the super yacht was US$250 million and was handed over to the Malaysian government in August 2018 pursuant to the US Department of Justice’s asset recovery operations as part of its probe into 1Malaysia Development Bhd (1MDB) funds.
Finance Minister Lim Guan Eng revealed that the government has spent over RM14.2 million to maintain the yacht over the last eight months.
Assuming the worst-case scenario whereby the Equanimity does not generate any revenue contribution over the next few years, CGS-CIMB estimates GENM FY19-21 earnings per share (EPS) could fall by 3.4-5%.
“However, we maintain our EPS forecasts for now until we have clarification of GENM’s future business plans for Equanimity.”
The research house opined that the deal will have minimal impact on GENM’s balance sheet as net debt will rise to RM2.28 billion or 0.12 times net gearing. As at end Dec-18, GENM had RM1.77 billion of net debt or 0.1 times net gearing.
CGS-CIMB is maintaining a “hold” call on GENM with an unchanged target price of RM3.25.
“Re-rating catalysts are the opening of the new outdoor theme park in 2019F and positive earnings contribution from Equanimity while de-rating catalysts are the new theme park failing to open in 2019 and losses from Equanimity.”
Given GENM’s large cash pool of about RM8 billion, PublicInvest Research believes the group could easily finance the acquisition with its internally generated cash.
“Based on our estimate, this could result in a 5-7% decline in our FY19-21 net profit forecasts if we were to factor in the impact of loss of interest income, additional depreciation cost and maintenance cost for the super yacht.”
PublicInvest Research is maintaining its “underperform” rating on GENM with an unchanged target price of RM2.70.
