Stronger consumer sentiment amid zero-rated GST and casino capacity expansion point to an earnings growth/recovery for the gaming segment. Decent dividend yields and potential positive newsflow support our OVERWEIGHT call, although there is still impairment risk for the casino segment and licensing renewal risk for BST’s Philippines operation. We expect the casino segment to shine following the NFO segment’s 1H18 outperformance. Top picks are GENM and Magnum.

WHAT’S NEW

• Gaming sector outperformed due to its defensiveness post GE. The gaming sector outperformed the KLCI index (gaming sector: +4%, KLCI Index: -4%) post Malaysia’s 14 General Election (GE14) that was held on 9 May, due to the sector’s defensive nature amid the uncertain market environment. Specifically, the long-time depressed Number Forecasting Operators (NFO) segment generated a return of 25% post GE14, outshining casino segment’s 2% for the same period.
• High foreign shareholding not a concern. The casino segment’s relative underperformance in the sector could partly reflect concerns of foreign shareholders exiting the Malaysia bourse, in view of the ringgit softening amid uncertainties to new government policies, and the country’s debt and deficit. However, we understand that there was little change in foreign shareholding pre- and post- election. Genting Malaysia’s (GENM) foreign shareholding was 38.7% (-0.5ppt mom) while Genting Berhad’s (GENT) was largely unchanged at 45% as at 30 May. Meanwhile, the foreign shareholdings for Berjaya Sports Toto (BST) and Magnum were largely stable at 12% and 26%, respectively. This observation, plus the hitherto resilience of the ringgit, has made us conclude that foreign shareholding in the gaming sector would not be swayed by the new political landscape.

ACTION

• Maintain OVERWEIGHT; prefer casino over NFO. The sector should benefit from the stronger consumer sentiment, earnings enhancement due to zero-rating GST (from 6% previously) and continue to outperform the broader market in 2H18. We prefer the casino over the NFO segment, as the casino segment would benefit from both earnings and newsflow (opening of Fox theme park). The NFO segment’s upside should be more gradual after May’s spectacular rally, although the long-speculated potential listing of Magnum’s 6%-owned U-Mobile could provide further uplift to Magnum.
• Key picks are Genting Malaysia and Magnum. Our preference remains on exposure towards GENM (BUY; Target: RM6.28) within the Genting Group as it directly benefits from the Genting Integrated Tourism Plan (GITP) project. For NFOs, we prefer Magnum for its potential upside from newsflow standpoint (listing of U-Mobile and cancellation of IRB penalty) and potential upside on dividend yield.

ASSUMPTION CHANGES

• We increase our net profit forecasts for BST by 10-12% for FY19-20 to reflect the zerorating GST from Jun 18 (note that we have reflected zero-rating GST in the earnings forecasts for the other three gaming companies). BST’s target price is only marginally increased to RM2.86 (from RM2.80) following the earnings adjustment but we now impute a 5% discount to our RNAV given the potential risk on licensing renewal in its Philippines operations.
• We also revise Magnum’s target price to RM2.50 (from RM2.26) as we reduce the DCF discount from 20% to 10%, given the lower risk of paying RM476m IRB penalty now. Maintain BUY on BST and Magnum.

ESSENTIALS

• Zero-rating GST could boost sector earnings by 10-12% on a full-year basis… The new government’s zero-rating of the 6% Goods and Services Tax (GST) effective 1 Jun 18 is estimated to boost NFOs’ net profit by 10-12% and GENM’s adjusted EBITDA by 11%, on a full-year basis. Prior to Jun 18, both casino and NFO operators will fully absorb the 6% GST.
• ...but still too early to tell if there will be other forms of tax replacement. While gaming companies are a clear beneficiary of zero-rated GST, it is still too early to confirm if the government will: a) increase the gaming tax/ betting duty, and/or b) introduce another form of tax to minimise the loss of revenue from the gaming sector.
• Sector to benefit from strong consumer sentiment and higher disposable income… With the reduction of GST rate to 0% and the reintroduction of petrol subsidy to address the higher cost of living, the gaming sector is expected to benefit from recovery in consumers’ sentiment (particularly in June-Aug period whereby purchases will not be subject to both GST and SST) and higher disposable income over the long run.
• …but there could be a short-term impact from 2018 FIFA World Cup. We believe that there could be mild negative revenue impact from 2018 FIFA World Cup, which is slated to start on 14 June. Quarterly ticket sales per draw drop 3.0-3.5% yoy during the 2014 FIFA World Cup.
• Casino: Good earnings visibility. The casino segment should benefit from good earnings visibility through to 2019, led by further improvement in visitor arrivals post the opening of 20th Century Fox Theme Park (targeted at end-18), higher gaming volumes and absence of GITP-related start-up costs in 2019. To recap, GENM’s Genting Highlands has recorded impressive visitor arrivals growth (+26% yoy) with both VIP and mass market GGR recording double-digit growth in 1Q18, thanks to the new attractions (Sky Casino, Sky Avenue retail mall and Theme Park Hotel as well as Genting Premium Outlet at the mid-hill). All in all, we expect GENM to deliver a two-year EBITDA CAGR of 26% through to 2019.
• Casino: Attractive valuations. GENM’s and GENT’s current share prices are attractive, ahead of eventful catalysts emerging towards the year-end. Essentially, GENM is trading at 11.4x/8.8x 2018/19 EV/EBITDA (below mean) while parent company, GENT, is trading at 6.6x/6.1x 2018/19 EV/EBITDA (below -1SD mean), significant EV/EBITDA discount to its subsidiaries (Genting Singapore’s 2018/19 EV/EBITDA at 9.2x/8.7x). GENT will indirectly benefit from its subsidiaries’ various event catalysts, including GENS’ earnings recovery and good long-term prospects in clinching an IR concession in Japan. However, this could be offset by investors’ concern in impairment risk, such as its various investments in life science companies.
• NFO: Stabilised ticket sales and compelling dividend yields. The NFO industry has seen sales stabilisation in the past two quarters after years of decline in ticket sales. We expect the industry to see positive ticket sales growth in 2018, although it could only be mild at low single digit. NFO yields are still compelling at 5.4-7.0%, despite the NFO segment’s share price performance rally >20% in the past one month. For Magnum, we conservatively assume 70% earnings payout (2017A: 77%) in 2018-20, while pending the final outcome on its IRB penalty court case. Prospective yields would be 6.6-7.0% should the payout ratio increase to 90%.
• NFO: Newsflow-driven catalyst still on the cards. We expect the next meaningful share price growth leg to be newsflow driven, such as legalisation of online betting, more rigorous measures to counter illegal gambling by the new government as well as Magnum’s company specific newsflow. To recap, Prime Minister, Dr Mahathir Mohamad has earlier said that the government will investigate whether certain businesses were harassed by the IRB into paying more taxes than what was due. This may imply a lower chance of Magnum having to pay the RM476m IRB penalty. Meanwhile, the potential IPO listing of Magnum’s 6.3%-owned U-Mobile would allow Magnum to eventually cash out from its investment (book value of RM260m, or RM0.18/share), which in turn allows Magnum to significantly enhance its well-established capital management practice.

RISKS

• Earnings downside should there be tax regime change in the future.
• For the NFO segment, BST’s 88%-owned subsidiary, Berjaya Philippines (BP) is having legal proceedings with PCSO (Philippine Charity Sweepstakes Office). Arbitral Tribunal had ruled that BP has no exclusive right to supply lottery systems for Luzon territory and BP is appealing the arbitral tribunal’s decision. BP’s licence remains valid through to 21 Aug 18. Should BP fail in renewing its license, we estimate there will be 10-12% downside risk to BST’s earnings in FY19/20.
• For the casino segment, there are impairment risks for GENM’s RM1.6b interest-bearing promissory notes investment in the US Mashpee Wampanoag Tribe’s (IR) and GENT’s investment in pharmaceutical R&D company TauRx.

Source: UOB Kay Hian Research - 11 Jun 2018