We continue to see multiple catalysts for the gaming sector. Gaming taxes could rise after the abolishment of GST but the earnings impact would be moderate as the government is aware that sales could further flow out into the illegal market (for NFOs) and regional competitors (for casinos). Maintain OVERWEIGHT. Top picks: GENM and Magnum.

WHAT’S NEW

Gaming sector outperformed FBMKLCI post GE14. The gaming sector has seen some selling in casino companies post Malaysia’s general election 14 (GE14) but still outperformed FBMKLCI. To-date as at 9 May, the gaming segment fell only 1.2% vs the FBMKLCI’s 8.4% drop. Specifically, the long-depressed number forecasting operators (NFO) segment spiked 15% post GE14 to outshine the casino segment which fell 3% over the same period.

Multiple catalysts ahead. With the reduction of the GST rate to 0%, reintroduction of petrol subsidy and promise of a minimum wage increase to address the higher cost of living, the gaming sector is expected to benefit from a recovery in consumer sentiment. There are also multiple catalysts ahead, which include Genting Malaysia’s (GENM) opening of 20th Century Fox theme park by end-18 after numerous delays, Genting Singapore to see more newsflow on Japan IR concession bidding which will benefit parent company Genting Bhd (GENT), and Magnum’s potential monetisation of 6.3%- owned U-Mobile and the potential reduction of Inland Revenue Board (IRB) penalty.

Potential gaming duty hike? While gaming companies are beneficiaries of the zerorated GST, the government will likely increase gaming taxes to lift its revenue (we estimate the sector’s total tax contribution at 1.5% of the government’s total 2017 revenue). However, we expect the impact of gaming duty hikes to be moderate at worst. First, the quantum of the duty hikes would need to be balanced against further outflow into the illegal market, particularly for the NFO segment, and to regional competitors for the casino segment. Additionally, impact to the sector’s bottom line would be mitigated by NFO players’ likely passing on of the duty hikes to punters, which in turn fans the illegal market and dilutes the government’s revenue collection. While the casino would likely bear the full brunt of the duty hikes as they are unable to change the card games’ payout, the Genting Group’s earnings stream is geographically diversified.

ACTION

Maintain OVERWEIGHT; prefer casinos over NFOs. We prefer casinos over NFOs as the casino segment will benefit from earnings growth and newsflow (opening of Fox Theme Park). NFOs’ share price 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 GENM and Magnum. We continue to value exposure to GENM (BUY/Target: RM6.28) in the Genting Group as it directly benefits from the GITP project. For NFOs, we prefer Magnum for its potential upside from newsflow (listing of U-Mobile and cancellation of IRB penalty) and potential upside in dividend yield.

ASSUMPTION CHANGES

None.

ESSENTIALS

Casino: Potential gaming tax hike impact would be moderate. Recently, there have been expectations for gaming duties to rise after the GST was abolished, to augment the government’s revenue. We believe the potential tax-hike impact would be moderate, considering that a significantly higher tax would reduce Malaysia’s competitiveness against regional peers. The current gaming taxes for the VIP and mass market segments are 10% and 25%, vs effectively 5% and 15% in Singapore. Tables at the side bar provide 2019 EBITDA sensitivity towards gaming tax hikes for GENM and GENT. Note that our current 2019 EBITDA forecasts assume zero-rated GST and the gaming taxes remaining at status quo. We estimate the zero-rated GST could boost GENM’s 2019 adjusted EBITDA by 11%. Hence, depending on the gaming tax hike quantum, the net impact from such revision could be moderate as compared to pre-GST adjusted EBITDA.

NFO: May pass on costs if gaming tax hike materialises. The NFO industry has seen its pool betting duty revised to 8% (from 6%) in 2011, and the industry’s ticket sales growth has been declining since then. The industry recently saw stabilised ticket sales but they could be hit should the government revise the existing gaming tax (8%) and pool betting duty (8% net of gaming tax). Higher duties may force operators to pass on cost by lowering prize payouts, which in turn will force more punters into the illegal market which offers higher attractive prize payoust, and this will ultimately dilute the government’s revenue drive. The illegal market is thought to be at least twice the size of the legal market. Note that our current 2019 net profit forecasts assume zero-rated GST which could boost NFO’s 2019 net profit by 10-12% (see side bar table for earnings sensitivity on pool betting duty and gaming tax hike).

Casino: Impressive visitor arrivals and healthy underlying gaming volume growth. Due to the opening of new attractions (Sky Casino, Sky Avenue retail mall and Theme Park Hotel as well as Genting Premium Outlet at the mid-hill)., GENM’s Genting Highlands recorded an impressive 26% yoy visitor arrivals growth, with 6.5m visitors in 1Q18. We estimate visitor arrivals to increase from 23.6m in 2017 to 28m in 2019. Both VIP and mass market gross gaming revenue (GGR) recorded double-digit yoy growth in 1Q18, reflecting the full impact of capacity expansion undertaken since 2Q17. We expect gaming volumes, particularly in the mass market segment, to improve further towards end-18 to 2019, thanks to the opening of an indoor theme park (targeting end-3Q18) and Fox Theme Park (still targeting end-18). 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 event catalysts emerging towards year-end. GENM trades at 10.5x and 8.5x 2018-19 EV/EBITDA (below mean) while parent company GENT trades at 6.5x and 6.0x 2018-19 EV/EBITDA respectively (close to -2SD mean), at a significant EV/EBITDA discount to its subsidiaries (GENS trades at 2018-19 EV/EBITDA of 8.8x and 8.7x).

NFO: Stabilised ticket sales with newsflow-driven catalysts still on the cards. After its ticket sales stabilised in the past two quarters, we expect NFO’s ticket sales to see low-single-digit growth this year. With stronger consumer sentiment and higher disposable income after the implementation of zero-rated GST, the NFO industry’s longterm outlook is more certain now. Hopefully, the new government can curb illegal operators, which will help minimise the government’s loss of revenue. However, sales would be vulnerable should the government introduce a significant gaming tax hike, assuming the NFO industry passes on the cost increase to punters. We expect the next leg of meaningful share price growth to be newsflow-driven, such as legalisation of online betting, more rigorous measures to counter illegal gambling by the new government, and newsflow on Magnum.

RISKS

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.

BST may lose its licence in the Philippines should the final court outcome does not favour BST’s appeal of its exclusitivity in supplying lottery systems in the Luzon territory.

Source: UOB Kay Hian Research - 11 Jul 2018