MALAYSIA

Aggressive expansion triggers ratings downgrade

Global ratings agency S&P has joined other analysts in expressing concern that Genting Bhd’s aggressive expansion plans overseas may weigh on earnings and weaken its cash flow.

S&P Global Ratings recently lowered its long-term issuer credit rating on Genting Bhd to ‘BBB+’ from ‘A-‘, citing increasing leverage from its acquisition plans.

S&P also lowered its long-term issuer credit rating on its subsidiary Resorts World Las Vegas (RWLV) and the long-term issuer ratings of the company’s senior secured debt obligations to ‘BBB’ from ‘BBB+’.

Genting Bhd is a diversified conglomerate with operations ranging from plantations to property. It owns Malaysia’s only casino operator and its sister company in Singapore, which operates Resorts World Sentosa, one of only two IRs in the island state.

It is also developing an IR in Las Vegas and last year its Malaysian unit announced plans to privatise loss making Empire Resorts, the operator of Resorts World Catskills in New York, where it also operates Resorts World New York. Other group properties include Resorts World Bimini, Resorts World Birmingham in the U.K. and Crockfords in Cairo, Egypt.

“We downgraded Genting because we expect the company’s leverage and cash flow adequacy to weaken over the next 12-18 months, given its more aggressive expansion plans. We also believe the company’s risk appetite has increased,” the statement said.

“In the past year, Genting acquired 49 percent of Empire and privatized the company at a time of ongoing expansion at subsidiaries Genting Singapore (GENS) and RWLV. This 49has materially increased the group’s leverage and weakened its credit quality,” it added.

While Genting plans to restructure Empire’s debt and is negotiating with banks, this may not reduce Empire’s total debt, keeping it at US$640 million to US$670 million over 2019-20, S&P said.

Nevertheless, S&P still sees the outlook for Genting as “stable,” explaining that “despite the group’s heavy investment plan, its debt-to-EBITDA ratio will remain less than 2x in 2021 and beyond, after peaking at more than 2x in 2020.”

S&P also noted the possible future impact of Japan, where the group is focused on Osaka and Yokohama.

“Genting is bidding for the Japan Integrated Resorts (IR) project, and we believe the process is on track. However, obtaining the licenses and actual cash outflow for the project may take some time. We have therefore not included the Japan project in our base case analysis. We will evaluate the credit impact if and when Genting is awarded the license,” they said.

At home Genting Malaysia is finally expected to open a long-stalled outdoor theme park project in the third quarter of this year, which was a central plank in a multi-year overhaul of its Resorts World property in the Genting Highlands.

The company had spent RM8.4 billion out of a total RM10.4 billion earmarked for the Genting Integrated Tourism Project (GITP) as of the end of the third quarter and doesn’t expect further significant capital expenditure for the theme park as most of the infrastructure has been completed.

The theme park was originally a joint venture with 20th Century Fox, though the U.S. company pulled out of the project resulting in a tit for tat legal battle, which was resolved in July last year. The settlement allowed Genting a license to use some Fox intellectual property.

TA Securities notes that Genting is already seeing the benefits from enhanced attractions under the 10-year GITP, which include more dining and shopping facilities, as well as an upgrade and expansion of its hotels and entertainment facilities. In Q3, non-gaming revenue gained by 36 percent. Overall its Malaysian operations recorded a 5 percent increase in revenue, aided by higher hold percentage in the mid-to-premium players segment and non-gaming business.

Nevertheless, adjusted EBITDA decreased to RM537.5 million, mainly due to higher casino duties. RWG also registered a fall in overall volume of business in the gaming segment primarily due to lower incentives offered to customers.

Fitch also expects the roll out of new attractions at Resorts World Genting to support visitor growth and associated gaming revenue in 2020, particularly in the mass-market segment.

The group has been cutting back on costs to offset the impact of higher duties imposed by the government in its budget announcement in November, 2018. The Finance Ministry (MoF) raised casino duties to 35 percent, from 25 percent, on gross gaming income and gaming machine duties to 30 percent, from 20 percent, on gross collection. The MOF upped the annual casino licence fees by RM30 million to RM150 million, and machine dealer’s licence fees to RM50,000 a year from RM10,000 a year.

In its Q3 earnings statement, the latest available as of going to press, the company said it remained cautious in its outlook for the industry.

New AML regime comes into effect

Malaysia’s central bank issued a revised policy document to counter money laundering and financing of terrorism, with the regulation coming into effect on Jan. 1st.

The document provides guidelines for designated non-financial businesses and professions (DNFBPs) and non-bank financial institutions (NBFIs) such as licensed casinos carrying on gaming business, moneylenders and pawnbrokers.

Malaysia is stepping up enforcement on AML and cracking down on corruption after a scandal surrounding state fund 1MDB that led to the ouster of former leader Najib Razak and ensnared Goldman Sachs Group Inc.

Terengganu mulls easing gambling ban

The Malaysian state of Terengganu, governed by the Malaysian Islamic Party, is reportedly mulling a relaxation of its bans on gambling and alcohol in order to attract visits from cruise ships.

The effort is spearheaded by Terengganu Tourism, Culture and Information Technology Executive Council Chairman Ariffin Deraman, who sees cruise ship visits as a potential source of economic advantage.

He is said to be in talks with cruise operators like Seabourn Cruise Line, which is owned by the Carnival Corporation. Terengganu is known as a center for traditional Malay arts and culture.

It lies on the east coast of Malaysia, facing the Gulf of Thailand and the Riau Islands.