Resorts dropping with big volume

As at 3.45 pm, Resorts dropped 23 sen to RM2.42, with volume hitting 59 million units! What could have prompted such a big selldown?

Firstly, Resorts announced its results for 3Q2008 ended 30/9/2008, where its net profit dropped 11.4% q-o-q or 49.0% y-o-y to RM340.6 million while turnover was down 1.3% q-o-q but up 9.8% y-o-y to RM1.225 billion. The sharp drop in net profit vis-a-vis the previous corresponding quarter was due to an exceptional gain of RM337 million recorded last year from the disposal of investment in Star Cruises. If this exceptional gain were excluded, Resorts' net profit would have increased by 3.0% when compared to the previous corresponding quarter.



Secondly, Resorts has also announced a sizable acquisition yesterday. It has acquired 100%-stake in Bromet Limited (“Bromet”) and Digital Tree (USA), Inc. (“DT Inc”) for a total cash consideration of USD69.0 million (approximately RM249.8 million).

Resorts made this acquisition in order to have a stake in Walker Digital Gaming LLC (“WDG”), a 10%-owned investee company, and Digital Tree LLC (“Digital Tree”), a wholly-owned subsidiary, both within the Acquiree Groups. The business of WDG (from whom Digital Tree solely derives its revenue) is in the development, protection and commercialisation of gaming-related Patents.

In addition, the vendor [KH Digital Limited (“KHD”)] has granted a call option to Resorts for a cash consideration of USD1.00 to acquire, within a period of 18 months from the date of the Call Option Agreement, the entire issued and paid-up share capital of Karridale Limited (“Karridale”) at an exercise price of USD27.0 million (approximately RM97.8 million). The main asset of Karridale is its 100% equity interest in Faargy Limited (“Faargy”), which owns the 10% non-voting equity interest in Walker Digital Lottery LLC (“WDL”). WDL is principally involved in the development, protection and commercialisation of Patents attributable to the lottery industry.

In short, Resorts has acquired 10%-stake in WDG, which is into the development, protection and commercialisation of gaming-related Patents, for USD69 million & has an option to acquire a 10%-stake in WDL, which is into the development, protection and commercialisation of Patents attributable to the lottery industry for US27 million. Without looking at the numbers, it is hard to form an opinion on whether the acquisition was done at a good price and to add to the value of the company. However, the business of the acquiree companies seems like a good fit for Resorts & it is likely that Resorts made this acquisition at a good price, since it is a buyers' market now. In the present market, a company with deep pocket, such as Resorts, will be able to pick up good bargain (see this article from the Edge newsletter). I would be neutral on the acquisition given the lack of information about WDG & WDL.

Chartwise, Resorts has broken above its downtrend line. It has good horizontal support at RM2.40-42.


Chart: Resorts' daily chart as at Nov 26, 2008 (source: Tradesignum.com)

Based on positive technical outlook, I think Resorts could be a trading BUY at the present level of RM2.42.