Genting Malaysia Delisting – What should retail shareholders do?

Genting Malaysia Berhad (KLSE: GENM) used to be the stock darling of the Malaysia stock market. While the stock once hit a high of RM6 per share, it is currently languishing at a low of RM2.34.

Almost every Malaysians have had a childhood memory tied to Genting Highlands. It is the theme park that everyone wouldn’t mind visiting, even though there are plenty of other options available in Klang Valley, like Sunway Lagoon.

Over the past 20 years, there were periods where GENM outperformed both the SPY and KLCI. But even prior to the COVID pandemic periods, GENM had already started to retrace. Over a 20-year period, GENM only outperformed the KLCI by around +20%.

It would have been a roller coaster ride for long-term investors. The recent privatisation deal might come as a heartache and not a lifeline.

So what should GENM retail investors do now?

Understanding GENM’s business model

While most Malaysians are aware that GENM is the owner of Resorts World Genting Highlands, many might not realise that GENM also has a sprawling global leisure and hospitality business.

However, despite its international reach and presence across multiple continents, the Malaysia business remains the core driver, contributing the most revenue and EBITDA.

The Malaysia segment contributes 63% of GENM’s total revenue and 77% of GENM’s total EBITDA. Thus, a make-or-break scenario in the Malaysian business will have a huge impact on GENM’s performances.

Even though revenue might be trending upwards, the free cash flow margin and operating cash flow trends of GENM is rather erratic – many fiscal year have shown negative free cash flow, while the recent 3 fiscal years of positive free cash flow stems from lower Capex.

GENM’s historical valuation

Due to various fluctuations in GENM’s earnings, its historical P/E ratio is rather distorted and all over the place.

On average, discounting the more adverse periods, GENM trades at around 20x P/E ratio. Due to its shrinking profits and sluggish EPS growth in recent years, the company may still be trading at fair valuation, but that has cost share prices to retrace from its previous high.

And when EPS struggles, DPS will also be affected.

Although a low dividend yield might sometimes point to a stock being valued at a premium, a quick check on GENM’s historical DPS payout shows a stagnant payout trend rather than a growing trend.

So in all fairness, most investors would be losing money had they invested into GENM over the past 20 years.

The 50% threshold for unconditional takeover is met

On 4 November, news broke that Genting Bhd (KLSE: GENTING) has reached 50.105% ownership of GENM’s total shareholding. Genting, which held 49.999% of GENM shares prior to the posting of the offer document, acquired an additional six million shares to cross the threshold.

The offer is priced at RM 2.35 per share, a 10% premium prior to the takeover news going official.

The offer remains open until 24 November, unless extended or revised with independent advice circular expected to be released by 13 November.

What should shareholders do?

An offer pricing GENM at RM2.35 per share, indicates that the offer is pricing GENM fairly.

Based on anchor bias, many would argue that the offer price should be higher based on historical highs. But coming from GENTING’s point of view, if shares are traded at a premium, there wouldn’t be a need to privatise GENM in the first place.

Even from a P/B perspective, for a reputable hospitality brand, a 1.13x P/B ratio is relatively cheap.

GENM’s sluggish ROA and ROE points to a fact – the company might be growing its assets, but profits have not kept up as much as the assets growth.

So such companies, wouldn’t be able to trade at a premium, let alone command a premium delisting offer.

Buy Low Sell High – Its in the IPO and Delisting

Capitalistic humans are preconditioned to buy low and sell high. This occurs even in delisting and IPOs.

Owners would always aim for the highest possible IPO valuation when taking their companies public to propel their wealth, and would always look out for the best opportunistic offer to take their companies private if share prices fumble.

GENM might be a blue chip in the eyes of many Malaysian investors, but due to its low ROA and ROE, it has never once occurred to me to be a shareholder of Malaysia’s most well-known hospitality brand.

While I might find myself avoiding underperforming companies that end up being privatised due to mediocrity, I also remind myself to stay away from IPOs due to the hype.

Tips to avoid mediocre companies

If a company does not grow its bottom line in tandem with its topline, and does not grow its free cash flow, then something is not right

Couple with ROA and ROE trends, it would already give a clear indication whether a company is a buying candidate.

These are just some basic screens I used before diving deeper into any company. But I hope this could help you prevent buying companies that looks great on the outside, but turn out mediocre when it comes to delivering total shareholder returns.

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