We downgrade our sector call to NEUTRAL (from Overweight) as the duration of Covid-19 remains uncertain at this juncture. The MCO (18-31 Mar) has led to the closure of gaming operations for both the NFO and casino operators in Malaysia. As the outbreak has yet to be contained, we do not discount the possibility of further extension in the MCO. On a longer-term basis some stocks are trading at attractive valuations whereby GenT (BUY, TP: RM4.80) is our top pick as it trades at a huge discount to its SOP-valuation causing it to be the most deep-valued stock amongst the other counters. We also like GenM (BUY, TP: RM2.31) for its attractive dividend yield and positive longer-term prospects with the upcoming OTP launch.

Temporary halt in NFOs. As NFO operations do not fall under any essential services, they will be temporarily ceasing nationwide operations during the Movement Control Order (MCO) and all purchased tickets for the respective draw dates within the period will be refunded as there will be no prize claims. A rough calculation implies that the reduction of draws within the respective period (i.e. 6 draws) would impact BToto’s bottom-line by c.4%. We may see the possibility of an increase in special draws to offset the tax revenue loss from the reduction in draws, in light of a possible extension in the MCO. To recap, the number of special draws has been decreased to 8 days (from 22 days) over the past two Budget announcements. Nonetheless, this remains uncertain at this juncture given the recent change in governing administration.

GenM’s visitation hit. GenM’s FY20 earnings are expected to be affected with the closure of numerous operations in Malaysia due to the MCO, while operations in the US and UK will be temporarily closed, until further notice. Given the rise of Covid-19 cases seen in both countries, we remain uncertain on the duration of the closures given possibility of an MCO extension. As such, we have trimmed FY20 earnings in our recent report which now shows a decline of -50% YoY to reflect decreased visitor arrivals.

Singapore not sparred... Despite Covid-19 being relatively more contained in Singapore (vis-à-vis Malaysia) as of now, we expect GenS’ earnings to also be hit hard as RWS’ gaming revenue is estimated to be mainly driven by the international market. As it is, local visitations have been on a decline, evident by the decrease in casino entry levy collected by the Singapore Tote Board to SGD125m in FY19 (from c.SGD170m back in FY12. We expect local visitations to be hit by the increase in casino entry levies by 50% to SGD150 daily levy and SGD3,000 for annual levy.

… as international visitation will take a hit. Based on the latest data available (Jan 2020), visitors from Greater China (includes Hong Kong and Taiwan etc.) constitutes a quarter of international visitors in Singapore. A statement released by the Singapore Tourism Board stated that arrivals this year are expected to fall by 25-30% amidst the outbreak. Note that this was issued back in Feb 11, whereby the situation has significantly exacerbated globally since, with lockdowns taking place in various countries. Furthermore, GenS has also issued a profit warning guidance which states that it expects the financial results for 1HFY20 to be significantly impacted.

Valuation

BToto. We cut BToto earnings forecast for FY20/21/22 by -19%/-0.1%/-0.6% to reflect the reduction in number of draws alongside lower contributions from the UK operations and maintain our HOLD call with a lower TP of RM2.26 (from RM2.59) in line with the earnings changes. Our valuation is based on DCF valuation with a higher WACC at 8.8% (from 8.1%) and TG of 1.5% to reflect the uncertainty in current market conditions. Nonetheless, management would still be keen on maintaining dividends of roughly 4 sen per quarter, which implies a good yield of 7.3%.

GenM. We had previously revised our earnings (FY20: -35.1%) and TP (to RM2.31) downwards while upgrading to a BUY call (from Hold) in a recent report dated 20 Mar 2020. The YTD share price fall of 44% has somewhat priced in the Covid-19 impact and now offers some buffer to bottom nibble as we like GenM for its attractive dividend yield of 9.7% alongside positive longer-term prospects with the OTP as a catalyst.

GenS. We cut GenS earnings forecast for FY20/21 by -49.7%/-0.5% to reflect the worsening Covid-19 impact. Downgrade to HOLD (from Buy) with a lower TP of SGD0.59 (from SGD0.96) after imputing the forecast changes while imputing a lower EV/EBITDA multiple of 5x (roughly -2SD below 5-year mean) towards mid-FY21 EBITDA. We believe mid-FY21 valuation is a fairer timeline yardstick to use as FY20 numbers alone would be undervaluing the company’s longer-term outlook, while rolling over to FY21 entirely would be neglecting the near-term impact of the outbreak. Share price may potentially remain subdued in the near-term given the duration uncertainty of Covid-19, which does not bode well for Singapore as it is highly dependent on international visitors. On the other hand, a net cash position of SGD0.31 per share and an attractive dividend yield of 7.1% alongside potential news from Japan pertaining to the casino bill should serve as a support to share price. We will revisit our valuation multiple upon further clarity on the outbreak impact.

GenT. We cut GenT earnings forecast for FY20/21 by -30.7%/-0.4% as we impute the earnings changes from its subsidiaries (GenS, GenP, and GenM). Maintain BUY with a lower TP of RM4.80 (from RM6.17) in-line with the changes in the TPs alongside an unchanged holding discount of 50% to our SOP-derived value of RMRM9.60. GenT has fallen alongside its listed subsidiaries whereby share price has now almost halved YTD. However, by taking GenT’s market cap and dividing it by the market cap of its listed subsidiaries (adjusted for stake), GenT is currently trading at only 0.6x of its effective subsidiary ownership value, or at -3SD below its 10-year mean (Figure #9). Note that this multiple metric has not taking into account the additional value of GenT’s other unlisted revenue drivers which would further contribute to its fair value (e.g. power, O&G, management fees, holding company net cash position). As such, we believe GenT remains a deep-value stock with its compelling valuations, positive longer-term outlook and a decent dividend yield of 5.8%.

We downgrade our sector call to NEUTRAL (from Overweight) as the duration of Covid-19 remains uncertain at this juncture. Note that casino operators have fallen 40- 50% YTD and may possibly remain subdued in the near-term despite trading at attractive valuations. On a longer-term basis, some stocks are trading at attractive valuations whereby GenT (BUY, TP: RM4.80) is our top pick as it trades at a huge discount to its SOP-valuation causing it to be the most deep-valued stock amongst the other counters. We also like GenM (BUY, TP: RM2.31) for its attractive dividend yield and positive longer-term prospects with the upcoming OTP launch.

Source: Hong Leong Investment Bank Research - 31 Mar 2020