After two quarters of being NEUTRAL on the sector, we are upgrading the Gaming sector to an OVERWEIGHT again for 3Q13 following the recent upgrade in our rating on GENTING after its 1Q13 results. While there is still a lack of earnings catalyst in the next 12 months, GENTING is expected to ride on the overall buoyant local market sentiment and on the prospect of a possible new casino bill being tabled in Japan this year-end. Nonetheless, we still prefer the resilient GENM over GENTING for the former’s more relatively stable local income while the latter is exposed to the volatile GENS’s earnings and CPO prices. On the other hand, NFO is still our PREFERED pick over Casino players given that the valuation of MAGNUM is not fully reflected yet in its price. Thus, MAGNUM  remains our TOP PICK for the sector.

Mixed bag of 1QCY13 results.  Out of the four gaming stocks, two of them reported earnings which were below expectations in the recent reporting season while the other two came in within and below expectations respectively. Berjaya Sports Toto Bhd’s (“BJTOTO”, UP; TP: RM4.02) 4Q13 earnings came in slightly below estimates due to higher than expected depreciation and interest charges while Genting Bhd (“GENTING”, OP; TP: RM12.28) was hit by unfavourable luck factors at Genting Singapore plc (“GENS”, NOT RATED)  and its London casinos.  Magnum Bhd’s (“MAGNUM”, OP; TP: RM4.37)  1Q13 results came in surprisingly above expectations thanks largely to a more favourable luck factor. On the other hand, Genting Malaysia Bhd’s (“GENM”, OP; TP: RM4.39) results were largely in line.

Better luck at the NFOs.  MAGNUM’s luck factor was exceptionally good in 1Q13 where its estimated prize payout ratio (EPPR) improved to 60.9%, which was much lower than our assumption of 63% and the 74.3% registered in the preceding quarter. The luck factor at BJTOTO was weaker but not alarming where its EPPR increased to 61.2% in 4Q13 from 58.9% previously. However, after enjoying the good luck factor in 4Q12, GENS got hit again in 1Q13 as the rolling chip-win percentage for its VIP segment dropped to 2.1% from 3.0% previously. Likewise, its London casinos were hit by a lower hold percentage coupled with lower business volume, which led to the 1Q13 revenue contracting sharply by 49% QoQ. Elsewhere, its Malaysian casino reported a higher hold percentage in the VIP business in 1Q13 with higher business volume while New York saw a recovery in business volume after the racino was affected by Super Storm Sandy in 4Q12.

Strong ticket sales due to CNY factor. Both MAGNUM and BJTOTO reported commendable ticket sales in 1Q13 due to the CNY effect. For the first time in three years, MAGNUM’s ticket sales (+14.5% YoY to RM920.6m) overtook BJTOTO (+2.2% YoY to RM905.6m) partly due to the fact that MAGNUM had 46 draws, which was higher than the 45 draws conducted by BJTOTO. In the coming 2QCY13 results, we believe that NFO ticket sales will soften from their high-base CNY quarter. For the full year, we expect ticket sales to grow at 2.3% for MAGNUM in FY13 and at 1.3% for BJTOTO in FY14. We believe our assumptions are fairly conservative as we are assuming only 176 draws a year each for both NFO companies compared to their 179 draws each conducted in the preceding year.

The local casino enjoyed higher volumes but not others. While GENM was hit by higher opex and social contribution, the hilltop resort managed to record a higher business volume. However, its other casinos like RWS and London casinos registered weaker top lines on lower business volume and luck factor. The 1Q13 leisure and hospitality revenue gap between GENM and GENS narrowed to RM321.3m from RM597.9m in 4Q12. On the other hand, the gap of casino revenue between RWS  and MBS widened to c.USD375m in 1Q13 from c.USD204m in 4Q12. In 1Q13, RWS had 48% of the market share of rolling chip volume.

Upgrade to OVERWEIGHT. Following our recent upgrade for GENTING to an OUTPERFORM, we are now upgrading the sector call to OVERWEIGHT from NEUTRAL previously. MAGNUM remains our TOP PICK for the sector given its re-rating and yield story. GENTING will be the focus in 2H13, especially since Japan is likely to table its casino bill at this year-end while the expected buoyant local market should also benefit it. Even then, we still prefer GENM for its resilient local earnings. BJTOTO remains our non-consensus UNDERPERFORM call in the sector. 

Source: Kenanga