KUALA LUMPUR: The related party transaction (RPT) that costs Genting Malaysia Bhd (GenM) RM538.8 million cash has wiped out RM2.6 billion from the casino operator’s market capitalisation yesterday.

The announcement on GenM buying a 35% stake in loss-making Nasdaq-listed gaming company Empire Resorts Inc from its controlling shareholder Tan Sri Lim Kok Thay, who is also the executive chairman, sparked fierce selldown on the stock.

The selling spree disrupted the recovery on GenM’s share price which was earlier fuelled by the good news that the group has settled the dispute with Twenty First Century Fox Inc and Walt Disney Co over the construction of an outdoor theme park.

GenM’s share price plunged as low as 14.68% or 53 sen to RM3.08 shortly after the opening bell yesterday. It managed to pare some losses to close at RM3.18, down 43 sen or nearly 12% — the third largest single day drop since November last year when the government raised casino gaming tax to 35%.

Some 256.37 million shares were traded yesterday, making it the most actively traded counter on the local bourse. GenM was also the second top loser yesterday. Still, the counter has climbed 12%, from the low of RM2.84 year-to-date.

Some quarters commented the selling reflected that the RPT did not go down well with the minority shareholders as it is perceived to be unlikely to contribute much to GenM’s future earnings. Furthermore, the acquisition does not require shareholders’ approval.

Should the sum of RM538.8 million to be utilised for dividend payment, shareholders will receive about nine sen per share.

In a report yesterday, TA Securities analyst Tan Kam Meng is neutral on the acquisition. However, he maintains a “sell” call on the counter, explaining that the investment amount of US$128.6 million is relatively small for the company to take part in the US$1.5 billion development of Resorts World Catskills (RWC).

Empire owns and operates RWC, a casino resort situated on a 1,700-acre site in New York.

“No change to our FY19 (the financial year ending Dec 31, 2019) to FY21 earnings projections, pending the completion of acquisition and proposed joint venture (JV),” said Tan, adding that GenM would not have difficulties in financing the acquisition and its net gearing would remain low at 0.12 times.

UOB Kay Hian has downgraded GenM to sell with a target price of RM3.16 and also downgraded its parent company Genting Bhd to hold with a target price of RM7.48.

“Using a simple assumption, the acquisition could dilute GenM’s net profit by 8% assuming Empire continues to make losses equivalent to about RM580 million (although the conversion of preference shares should reduce interest cost and losses), while reducing its net cash by almost RM630 million (assuming a successful privatisation where it acquires from Empire’s minority shareholders based on its proportionate ownership jointly with Kien Huat),” UOB Kay Hian’s head of research Vincent Khoo wrote in a research note yesterday.

Nonetheless, RHB Investment Bank Bhd analyst Lee Meng Horng commented in a report that the acquisition price appears to be fair, while the acquisitions are not value accretive and may negatively impact the earnings forecasts on GenM.

“We believe that acquiring RWC would help to anchor the north-eastern US gaming market alongside Resorts World Casino New York City and avoid cannibalisation.

It would also tap into the potential online sports betting market (if legalised) via the collaboration with bet365, as New York’s annual sports betting revenue is expected to hit US$1billion within the next five years,” said Lee.