This article first appeared in The Edge Financial Daily on April 5, 2018 - April 11, 2018

Gaming sector
Maintain overweight: We believe 2018 is an exciting year for casino operators as the Genting Integrated Tourism Plan (GITP) expansion story is timely, bearing fruits for Genting Malaysia Bhd (target price: RM5.80), thus indirectly benefiting parent Genting Bhd as well. In fact, the non-gaming segment has witnessed improving results in the past few quarters following the opening of the SkyAvenue mall early last year and Genting Plantations Bhd and Genting Highland Premium Outlets last June. In addition, there is the opening of the brand-new 20th Century Fox Theme Park by year end. This will escalate its non-gaming business to another new level, making Genting Malaysia the key focus for gaming stocks in the next one to two years. On the other hand, the recovery of rolling chip volume across the causeway should benefit Genting. In addition, the impending legalising of casinos in Japan should boost sentiment for both Genting Singapore plc and Genting based on past experience in Singapore back in 2006. It was reported that the introduction of the long-awaited IR (integrated resort) bill is likely to be delayed until at least this month, which means the chance of passing the bill this year could be slimmer. However, market talk had it that the number of IR locations could increase to five to six from two currently.

Magnum Bhd registered its first annual earnings growth in financial year 2017 (FY17) since 2012, while based on nine months of FY18 earnings, Berjaya Sports Toto Bhd (BJToto) should likely see its first annual earnings growth in three years as well in FY18. The latest improved results were supported by stabilised ticket sales, coupled with the normalisation of luck factor. Therefore, the worst could be over for number forecast operator (NFO) players. Furthermore, these two stocks also offer above-average dividend yields of 6% to 7%. On the downside, luck factor remains the key determining factor for forward earnings, while the incentive-based regulation tax penalty of RM476 million is an overhang issue for Magnum and could pressure BJToto as well.

In the fourth quarter of 2017 (4Q17) earnings reporting, the industry’s players reported a mixed bag of results with Genting’s 4QFY17 and BJToto’s 3QFY18 results, which were disappointing largely due to higher taxation. We were not alarmed as this was non-operating in nature while in fact, all four companies reported improved or at least stabilised business volume, which was a good sign. Going forth, the upcoming 1Q18 should be a seasonally strong quarter for gaming companies on the Chinese New Year (CNY) effect on better business volume. This is especially so for Genting Malaysia following the launch of the non-VIP floor of SkyCasino last March and the VIP floor at end-3Q17. On the other hand, the CNY effect was seen in both BJToto and Magnum, which reported higher average NFO ticket sales per draw by 4%/12% sequentially in last year’s CNY-led quarter. Meanwhile, the usual yearly 20 to 22 additional special draws will provide a boost to ticket sales for NFO players. All told, luck factor remains the key determining factor to their bottom lines.

We maintain “overweight”, except for Magnum whose share price has risen 5.17% in the past three months, while all gaming stocks saw their share prices falling between 3% and 13% against the FBM KLCI’s +3.71%. This was attributable to the disappointing results from Genting (-5.11%) and BJToto (-2.68%), but we were surprised by the sharp decline in Genting Malaysia (-12.97%) despite its improving business volume. In fact, Genting and Genting Malaysia are trading at 43% and 15% discounts to their sum-of-parts valuations against their 10-year average discounts of 46% and 21% respectively. With the GITP expansion and the recovery of Genting Singapore, the valuations of these two stocks appear fairly attractive. Meanwhile, judging from the stabilised ticket sales and share price movements, we have reason to believe NFO stocks should have bottomed out. In addition, the stocks offer attractive yields of 6% to 7%. As such, we maintain our rating on the gaming sector at “overweight”, with casino operators as our preferred sub-sector pick, and Genting as our top pick for the sector. — Kenanga Research, April 4