Shares of Genting Malaysia Bhd fell as much as 10 per cent today [2 July 2010] over concerns that its proposed acquisition of casino operations in the UK from its Singapore affiliate was too risky.
Genting shares dropped 28 sen, the most in nine years, to hit a low of RM2.46 before recovering to RM2.62 as at 12.15pm.
OSK Research has also cut its fair value for Genting shares from RM3.15 to RM2.55 and downgraded the stock from “Buy” to “Sell”.
Malaysia's sole casino operator had proposed to acquire the casino operations in UK (Genting UK) from its affiliate company Genting Singapore Plc for about RM1.7 billion. It had also separately proposed to develop a video lottery facility at the Aqueduct “racino” which combines racing with casinos.
OSK Research said in a report today that it felt the acquisition and development cost was not compensated by meaningful earnings growth prospects. It also said that there was inherent risk of future “value destructive related party transactions” and as a consequence is attaching no value to the group’s net cash balance.
“We view these developments negatively as the relatively high acquisition and development cost is not compensated by meaningful earnings accretion to the group despite Genting UK casinos’ long established operating track record,” said OSK Research.
It said that it was “cautious” on the medium-term viability of the US racino project pending more details on the development expenditure of the Genting bid.
It also noted that the winning bidder has to pay an upfront US$300 million (RM971 million) in non-refundable payment, which could be deemed a licensing fee.
“As such, we think that the cost of development could easily exceed RM1 billion,” said OSK.
Genting said in a statement yesterday that the proposed acquisition of Genting UK complemented its long-term international expansion plans.
The acquisition however will have to be approved by Bank Negara and the British Gambling Commission.
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