Genting’s energy ventures yet to excite investors

This article first appeared in The Edge Malaysia Weekly on June 24, 2024 - June 30, 2024

TO some, Genting Bhd’s (KL:GENTING) announcement of its RM5 billion energy ventures last week seemed to have come out of the blue. But to others, the announcement comes at a time when the gaming business is becoming more competitive than it was 50 years ago, when Genting first established its hilltop casino and resort in Pahang.

The conglomerate, synonymous with gaming and leisure, announced that it is acquiring a 49% stake in a Chinese company, which is developing a 2x745mw gas-fired power plant in ZhouShan, located in the Zhejiang Province of China, for RM278 million.

On the same day, it also announced that it had entered into an engineering, procurement, construction, installation and commissioning (EPCIC) contract with Chinese company Winson New Energies Co Ltd for a 1.2 million tonnes per annum floating liquefied natural gas (FLNG) facility that will be used in its operation of Indonesia’s first floating liquified natural gas (LNG) facility.

But the scale of the investment and the potential earnings from the energy ventures did not seem to excite investors, looking at how Genting’s share price performed, gaining 1.7% to RM4.77 last Friday — the day after the announcements were made. Year to date, the stock has risen 3.3%.

While some think that it could be because of the scant details on the future earnings from the ventures, which has caused investors to sit on the sidelines for now, others opine that the earnings that may be derived from the projects are only a drop in the ocean for the conglomerate.

Genting’s energy ventures yet to excite investors

Genting group president and chief operating officer Datuk Seri Tan Kong Han told a press conference that SDIC Jineng (ZhouShan) Gas Power Generation Co Ltd, the company developing the power plant in which Genting is acquiring a 49% stake, is expected to contribute up to US$346 million a year in revenue for 25 years.

In ringgit terms, it works out to some RM1.63 billion per year. For some perspective, RM1.63 billion per year from the 2x745mw gas-fired power plant is equivalent to 20% of the revenue Malakoff Corp Bhd (KL:MALAKOF) generated in FY2023, amounting to RM8.01 billion, from its power generation segment.

Malakoff operates five thermal power plants in Malaysia and two international assets in Saudi Arabia and Bahrain, generating a total of 5,930mw of electricity.

However, compared with Genting’s FY2023 revenue of RM27.12 billion, the RM1.63 billion works out to only some 6% of group revenue. It is worth noting that the additional RM1.63 billion per year from SDIC would nonetheless more than double the revenue of Genting’s existing power segment, which generated RM1.19 billion in FY2023.

Currently, Genting’s power-related assets include a 55% stake in a 660mw coal-fired power plant in Banten Province, Indonesia; 49% in SDIC Genting Meizhou Wan Electric Power Co Ltd, which owns two phases of coal-fired power plants in Meizhou Wan, Fujian Province, China; and the Jangi wind farm in India.

In FY2023, Genting generated group revenue of RM27.12 billion and a net profit of RM929.2 million. Some RM22.24 billion, or 82% of the revenue, was derived from its hospitality and leisure segment, as well as RM2.87 billion, or 10.5%, from its plantations segment. Power totalled RM1.19 billion, or 4% of group revenue, while oil and gas amounted to RM453 million, equivalent to 1.7% of group earnings in FY2023. The remaining RM353.7 million came from investments and its property.

Tan told the press that the group is taking “bold steps” to go forward in the energy ventures.

Group chairman and chief executive Tan Sri Lim Kok Thay added that the energy investments are part of the company’s long-term business strategy, but stressed that Genting’s core business will remain rooted in gaming.

The gas-fired power plant under SDIC is poised to achieve commercial operation in the fourth quarter of 2025. Construction, which began in 4Q2023, has achieved 10% overall progress and the group estimates that it will be required to put in a further RM213 million as pro rata equity investment up to the target commercial operation in 2025.

As for the floating LNG facility in Indonesia, which will be deployed at Teluk Bintuni, West Papua, Genting has commissioned Wison to build the facility for US$1 billion. The target sail away date from Wison’s Zhoushan shipyard is in 2Q2026.

According to Genting’s press release, the feed gas for the FLNG facility will be supplied from the Asap, Merah and Kido structures within the concession area of the Kasuri Block in West Papua, Indonesia, which was awarded to Genting Oil Kasuri Pte Ltd, a 95% indirect subsidiary of Genting pursuant to a production sharing contract signed in May 2008 between GOKPL and BP MIGAS, the Indonesian oil and gas regulator. The group did not provide further details on the contract.

Maybank Investment Bank Research says in a June 21 note that the gas fields are estimated to have proven and probable reserves of 2.674 trillion cu ft, or 474 million barrels of oil equivalent (boe).

“Assuming Genting has 50% share of the reserves, enterprise value/boe of US$10, we estimate that the FLNG and gas fields can accrete RM6.45 billion or RM1.68/share to equity value,” it says.

While investors may not have shown keen interest in the conglomerate’s energy venture yet, analysts are positive.

Maybank IB Research says the gas-fired power plant will increase the group’s net attributable operating capacity to 2,650mw from 1,800mw currently while the commissioning of the floating LNG facility will allow Genting to monetise its Indonesian gas fields, which has been in the works since the mid-2000s.

“On balance of probabilities, we believe these two developments will be long-term earnings and value accretive to Genting,” says the research house, which has a “buy” call and unchanged target price of RM5.84 on the counter.

Phillip Capital Research also views the acquisition of SDIC positively but opines that Genting will incur an additional RM156 million financing cost for its EPCIC contract, pushing net gearing to 55% from 45% as at end-2023. It has maintained its “buy” call on the stock, with an unchanged target price of RM4.90.

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