Highlights

Share prices of gaming companies have performed well even after the announcement of parliament dissolution, which is inline with our view that election risk is no longer the major threat. We further advise investors to look beyond and focus the potential earnings growth for the sector, especially the plans for Resorts World Las Vegas (RWLV).

Imputing the potential earnings by RWLV would indicate an accretion of RM0.62/share towards GenT’s current fair value.

Calculations are based on assumptions derived from various findings on three major listed casino operators in the Strip (MGM, LVS & Wynn).

As for remaining international ventures by GenM and GenS, nothing has changed since our last reports on 9 Apr and 13 Mar respectively. On the on-going casino development over in NEC @ Birmingham, we believe the potential enhancement to GenM’s overall earnings would be insignificant given its small scale, similar to Resorts World Bimini Bay (RWBB).

However, new ventures (especially NY and Florida) are potentials that would further augment current earnings growth trajectory and act as price catalysts.

Looking into the risk of any gaming tax hike, our sensitivity test and analysis showed that with every 1ppt hike, GenM and GenT will face downwards earnings revision of 2.2% and 0.9% respectively.

On the broader picture, a 1ppt hike will have a net tax gain of RM39.37m, or only 0.02% additional contribution to Malaysia’s total tax revenue. Given such insignificant quantum, we believe a hike in gaming taxes is unlikely to happen.

Catalysts

• Higher-than-expected visitors’ arrival into Malaysia.
• GenM’s UK development completed earlier-than-expected
• License to develop full-scale casino granted by New York’s and Florida’s legislators.
• GenS to penetrate into international markets.

Risks

• Hike in gaming tax.
• Disappointment on the legalization of full-scale gaming casino in both New York and Florida.
• Failure in casino license renewal in Malaysia and Singapore.

Rating

OVERWEIGHT

• Positives – (1) Defensive and monopoly industry
• Negatives – (1) Highly regulated industry; and (2) Earnings highly dependable on luck factor

Valuation

We remain OVERWEIGHT on the sector:

• GenM – Maintain BUY with unchanged TP of RM4.10 based on SOP valuations;
• GenS – We upgrade the company to BUY, with unchanged TP of SG$1.58 based on 11.5x FY13’s EV/EBITDA.
• GenT – We maintain BUY with higher TP of RM11.30 based on SOP valuations, after imputing GenS’ latest TP upon initiation, along with RWLV’s fair value of RM0.62/share.

Source: Hong Leong Investment Bank Research - 25 Apr 2013