GGRAsia – Genting costs review to offset tax hike impact: Fitch

Genting costs review to offset tax hike impact: Fitch

Nov 14, 2018 Newsdesk Latest News, Rest of Asia, Top of the deck

Fitch Ratings Inc says the proposals in Malaysia’s budget for 2019 are likely to have only a “limited impact” to Genting Bhd, the parent of Genting Malaysia Bhd. The latter runs the Resorts World Genting (pictured) in Malaysia, and operates casinos in the United States, the Bahamas and the United Kingdom.

Malaysian Finance Minister Lim Guan Eng announced in his budget speech earlier this month that the annual fees for casino licences will be increased to MYR150 million (US$36 million) from MYR120 million, and that duties on gaming gross revenue would rise to 35 percent from 25 percent.

In a report this week, the ratings agency said it expected the increases to weigh on the group’s earnings, although such impact would eventually be offset by a review in spending.

Fitch estimated that Genting Bhd’s consolidated earnings before interest, taxation, depreciation, amortisation, and restructuring or rent costs (EBITDAR) would decline in the range of 8 percent to 9 percent, while net debt/EBITDAR would increase to 0.6 times in 2019 and 0.9 times in 2020 versus its previous expectation of 0.5 times and 0.7 times, respectively.

“This is assuming the tax rate will increase by 10 percentage points on gaming revenue before factoring in any potential cost savings from Genting Malaysia Bhd’s review of its marketing strategy and cost structure,” it added.

Genting Malaysia last week said it was “assessing the full implications” of additional taxes announced by the federal government. The statement added the firm would take “the appropriate next course of action,” which included “a review of its marketing expenditure and cost structure to mitigate the impact of the tax increases”.

In its latest report, Fitch said Genting Bhd’s financial profile remains in line with the agency’s leverage expectation. But the group’s financial flexibility “would be reduced”, owing to the fact the group was already working toward building the Asian-themed Resorts World Las Vegas, in Las Vegas, Nevada. A US$4-billion price tag has previously been mentioned for that project.

Ratings agency Moody’s Investors Service however says that the higher taxes, fees and levies on the gaming industry are a credit negative for the Genting group.

“The changes, in particular the increase in casino duties of up to 35 percent, is credit negative for Genting Bhd, because earnings contribution from its Malaysia leisure and hospitality segment will fall and consequently weaken the group’s leverage,” said Moody’s in a report last week.

The ratings agency expects Genting Bhd’s EBITDA to decline by about MYR650 million in 2019. The decline will erode the initial gains the group would likely achieve next year following the completion of the Genting Integrated Tourism Plan (GITP), aiming to revamp the flagship gaming venue near the Malaysian capital Kuala Lumpur, said Moody’s.

“Consequently, we expect Genting [Bhd's] credit metrics to weaken, but remain within its Baa1 rating parameters. Leverage, as measured by debt/EBITDA will likely increase to 3.8 times in 2019, from 3.5 times in 2018,” it added.