We are maintaining our sector rating at NEUTRAL with a preference for NFO players over Casino operators. The NFOs remain the near-term play for their corporate restructuring catalysts in 2013. As for casino players, there have little price and earnings catalysts at the moment and hence are only for longer-term bets on new markets opening up in the region soon. Given that they are politically sensitive, gaming stocks on the overall may also face challenges in a 2013 election year. However, MPHB, our TOP PICK, should continue to excel in 1H13 as its demerger exercise will be completed by then. Meanwhile, while we like the company’s gaming products, we believe that the listing of STM-Trust will de-rate BJTOTO lower. Meanwhile, GENM is preferred for its resilient home turf casino operations. However, the high-roller centric profile for GENS and the weak outlook for plantations will put GENTING’s earnings at risk.

4QCY12 results largely in line. All the four gaming stocks reported earnings, which were within ours as well as the market expectations in the recent reporting season except for Multipurpose Holdings Bhd (“MPHB”, OP, TP: RM4.31). MPHB’s 4Q12 results were disappointing as its full-year FY12 came in 9% and 6% below our estimates and that of the market consensus respectively. While Berjaya Sports Toto Bhd’s (“BJTOTO”, UP, TP: RM3.88) 3Q13 results were in line, the absence of an interim dividend, the first time in three years, was somewhat disappointing. The FY12 results of Genting Malaysia Bhd (“GENM”, OP, TP: RM4.19) and Genting Bhd (“GENTING”, MP, TP: RM10.22) beat our estimates by 3% (5% above the consensus) and 4% (5% above the consensus) respectively due to a better luck factor, improved non-gaming business at Genting Singapore plc (“GENS”, NOT RATED) and a turnaround at the London casino business, although the Malaysian casino posted weaker earnings.

Luck factors were mixed. Both MPHB and BJTOTO reported weaker luck factors and declining ticket sales. MPHB’s Magnum reported 4Q12 estimated prize payout ratio (EPPR) that jumped to 74.3% from 67.3% in 3Q12 while BJTOTO’s 3Q13 EPPR rose to 58.9% from 57.5% in 2Q13. Within the Genting group, its Malaysian casino is the only casino operation that posted a weaker luck at its high-roller segment while its casinos in Singapore and UK reported better luck, especially Genting UK, which turned profitable again thanks to improved earnings from its London casinos. During the quarter, Resorts World Genting incurred higher promotional expenses while the earnings of Resorts World New York City were hit by a lower business volume due to Super Storm Sandy. Resorts World Sentosa reported strong non-gaming business with the launch of Marine Line Park, which opened in Nov 2012.

NFO remains the focus in the near-term. Although the conclusion of their corporate exercises has been delayed to 2Q13 from Jan-Feb 2013 at both MPHB and BJTOTO, NFO players will continue to outshine the casino operators. MPHB is expected to be rerated for being a pure gaming stock post its demerger exercise while BJTOTO is likely to face a de-rating given its EPS and dividend dilutions after the listing of STM Trust in Singapore. We still believe that the NFO players will get their usual 20 Special Draws in 2013 but more special draws are expected towards the year-end rather than the earlier part of the year given the added “sensitivity” of GE13.

Resorts World is now in Las Vegas. In Mar 2013, GENTING made its first venture into Las Vegas Strip with a plan to build a USD2.0b hotel-casino resort scheduled to open in 2016. Although this is not unexpected as the group has been longing for casino operations in the US, what surprised us was that this project would be undertaken by GENTING instead of GENM. We are neutral on this venture as Las Vegas casinos have yet to recover from their deep downturn. The 2012 gaming revenue in Las Vegas Strip only grew 2% and was still down 10% from its glory day levels in 2007.

Staying NEUTRAL. While maintaining our NEUTRAL rating for the sector, our preference is with the NFO players over the casino operators given the boost from the former’s restructuring exercises. In addition, there are little price and earnings catalysts for GENT and GENM. MPHB remains as our Top Pick in the sector for its rerating story. For casino plays, we prefer GENM over GENTING. BJTOTO meanwhile continues to remain at our non-consensus UNDERPERFORM call.

Source: Kenanga