GenM: Huge Loss Due to Impairment

Results Update

In QE30/9/2018, GENM reported a huge net loss of RM1.49 billion mainly due to an impairment loss on the group's investment in the promissory notes issued by the Mashpee Whampanoag tribe (a native American tribe) for the development of an integrated gaming resort in the US on a piece of tribal land. 

The reason for the provision for the impairment loss was the uncertainty of recovery of the group’s investment following the US Federal Government’s decision against the tribe for the proposed development. The decision concluded the tribe did not satisfy the conditions under the Indian Reorganisation Act that allow the tribe to have the land in trust for an integrated gaming resort development. The Genting group would continue to work closely with the tribe on options which include a legislation being introduced in the US Congress which, if passed, will entail the US Federal Government to reaffirm the land in trust for the benefit of the tribe. If the proposed legislature is passed, the impairment loss can be reversed when the promissory notes are assessed to be recoverable.

Table 1: Genm's last 8 quarterly results

If we exclude the provision for impairment loss for the investment in promissory notes for the development on US tribal land, Genm's operating profit rose 120% q-o-q or 23% y-o-y to RM661.6 million. This improved performance is on the back of higher revenue, which rose 7% q-o-q or 15% y-o-y to RM2.60 billion.


Table 2: Genm's quarterly results for QE30/9/2018

Below is the graph of Genm's last 50 quarterly P&L. The top graph shows revenue and profits as reported while the lower graph shows profits excluding extraordinary gains or losses. From the lower graph, we can see that Genm's revenue is rising steadily while profits, which have been flattish for past 6 years, are now swinging up.


Graph: Genm's last 50 quarterly results 

Valuation

Genm(closed at RM2.86 last Friday) is now trading at a Price-to-Book of 0.9 times. We cannot compute its PER as Genm made a loss for the past 4 quarters.

Technical Outlook

Genm's share price has been dropping like a stone in the past 2 months. The decline was due to fear of new/ increased taxes (which came true) and theme park problem. This morning, it will have to withstand any sharp drop due to the huge impairment loss.

I believe that the stock is oversold going into today's trading. A drop to the long-term uptrend line at RM2.50 or the horizontal line at RM2.20 may bring out buying support.


Chart 1: GenM's daily chart as at Nov 30, 2018  (Source: Malaysiastock.biz)


Chart 2: GenM's monthly chart as at Nov 30, 2018  (Source: Malaysiastock.biz)

Conclusion

Despite the poor financial performance and earlier 2 bad news (increased casino tax by 10% and theme park hiccup), Genm is a good stock for long-term investment in view of its unique business and strong management.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.