For the first time in two years, we have OUTPERFORM calls for all the gaming stocks under our coverage. However, we remain negative on BJTOTO’s STM-BT listing exercise and the recent upgrade is merely on improved valuation reasons after a revised STM-BT share offer and share dividend amount. MAGNUM is still our TOP PICK for its compelling valuation and yield play while GENM is our preferred casino pick for its resilient earnings although parent GENTING will be the focus in the next one year given the potential new markets in the region. We expect no changes in gaming tax in the upcoming Budget 2014 while the much anticipated GST implementation should have little impact on the sector. As we are entering the busy year-end festive and holiday season, the casino operations would likely post strong business volume growth compared to 3Q13 and we expect NFO ticket sales to see growth as well.

2QCY13 results largely in line. All gaming stocks reported decent earnings report cards which were within expectations in the recent reporting season except Genting Bhd (“GENTING”, OP; TP: RM12.03) in its 2Q13 results were hit by higher-than-expected minority interest. Nonetheless, GENTING surprised with a RM0.50/share gross special dividend and a restricted 1-for-4 warrants at an issue price of RM1.50/warrant which we view as a positive for a better capital management. While the 2Q13 results were fairly in line, Genting Malaysia Bhd (“GENM”, OP; TP: RM4.39) declared a higher NDPS of 4.3 sen compared to the 3.8 sen paid a year ago. Magnum Bhd (“MAGNUM”, OP; TP: RM3.89), after the completion of the decoupling exercise, reported its first gaming-only quarterly results with no surprises. Its 1H13 NDPS of 10 sen vs. 3.5 sen paid in 1H12 is on track to meet its new 80% dividend payout policy. While waiting for the STM-Business Trust’s listing to be completed, Berjaya Sports Toto Bhd (“BJTOTO”; OP; TP: RM4.30) declared another disappointing dividend with earnings payout of 54% or 4 sen NDPS in 1Q14 but this should normalise to 75% payout once the corporate exercise is completed.

Better luck factor in the casino operations. The Genting casinos reported business volume which improved in 2Q13 except RWS where its VIP rolling chip volume normalised from the seasonally strong CNY quarter in 1Q13. Market share of rolling chip volume for RWS however improved slightly to 49% from 48% in the preceding quarter while the non-rolling chip market share breakdown remained at 47:53 between RWS and MBS. Both RWG and London-based casinos reported higher business volume but the latter was hit by higher bad debts written off in 2Q13. In the USA operations, RWNYC posted higher business volume but geographical segment earnings were offset by higher pre-operating expenses at RWB in the Bahamas. On the other hand, all casino operations enjoyed favourable lady luck this time round. The 2Q13 rolling chip-win percentage for RWS improved to 2.50% from 2.12% in 1Q13 while the average daily win per machine for RWNYC improved to USD443 in 2Q13 from USD416 in 1Q13.

NFO ticket sales normalised from the strong CNY 1Q13. MAGNUM reported a weak 2Q13, besides the RM69.8m disposal loss of non-gaming assets for the listing of MPHB Capital Bhd (NOT RATED), with poor luck factor and the normalisation of ticket sales as the contributing factors. MAGNUM’s ticket sales contracted 17% QoQ while its estimated prize payout ratio (EPPR) rose to 67.3% from 60.9% in the preceding quarter. On the other hand, BJTOTO’s 1Q14 ticket sales also declined by 7% over the quarter but EPPR improved to 57.7% from 61.2% in the preceding quarter. In all, the total ticket sales for BJTOTO in 2QCY13 overtook MAGNUM’s by 15.5% to RM878.5m vs. RM760.4m as MAGNUM’s ticket sales declined 17% over the quarter. Both NFO players had 44 draw days during the quarter.

OVERWEIGHTing the sector with MAGNUM as TOP PICK. Following our recent upgrade on BJTOTO, all four gaming stocks under our coverage are now rated OUTPERFORM. Although BJTOTO is BUY now, we remain negative on its plan to list the NFO operations as Business Trust in Singapore given the earnings and valuation dilutive effect. This upgrade is merely to take into account the effect of revised share offer and a dividend share to benefit its existing shareholders. We may look to review our call once the dividend shares are distributed. GENTING will be the focus in 2014, especially since Japan is likely to table its casino bill at this year-end while the expected buoyant local market should also benefit its operations. Even then, we still prefer GENM for its resilient local earnings. MAGNUM remains our TOP PICK for the sector given its compelling valuation and yield story. 

Source: Kenanga