The casino sub-segment will be in the centre stage this coming year mainly driven by a potential new market in the East namely Japan. This is definitely a good price catalyst ahead of the bidding race involving operators like GENS, thus benefiting its parent GENTING. On the other hand, the RM5b 10-year refurbishment program at the hilltop resort would put the already earnings resilient GENM in the league of world class holiday destination, although its valuation appears less attractive at this juncture. For the NFO segment, MAGNUM is now a yield play after the decoupling exercise in June 13 while we have turned positive on BJTOTO after it aborted the valuation-dilutive plan to list its NFO operations in SGX-ST as a business trust. All said, we are now switching our preference to casino operators over NFO plays for the first time in six quarters. The switch is driven mainly by the potential new casino market in Japan. NFO players which have recently completed/aborted their corporate exercises are currently facing a lack of investment impetus. Our TOP PICK for the sector is now GENTING for the new Japan market catalyst and also on improved prospects for its plantation exposure on better CPO prices.

Japan is the next focus. After months of speculation, Japanese lawmakers finally submitted the Casino Bill to the parliament in early Dec 13. The Bill is anticipated to be passed by 1H14 with casino licensing in 2016. The move aims to legalise casino gambling in this aging developed country to stimulate economic growth which is already facing near zero growth since the 1990s. Taking cue from the Singapore’s gambling legalisation experience in 2006, casino stocks are likely to perform well in 2014 riding on this new market. It was reported that the Japanese will mirror the Singaporean model, which is the integrated resort-casino model, with at least one casino starting operations before the 2020 Tokyo Olympic. On that score, Genting Singapore plc (GENS, NOT RATED) will be the candidate within the Genting group of companies to take part in the competitive casino licence bid. Although it is too early to gauge its chance of success, the possibility will benefit the share price momentum of its parent company Genting Bhd (GENTING, OP; TP: RM12.55).

A new face in the home turf operations. The RM5b10-year Genting Integrated Tourism Plan (GITP) will be a major structural change to Genting Malaysia Bhd’s (GENM, MP; TP: RM4.39) Resorts World Genting, transforming the hilltop resort into a world class theme park. The RM1b 20th Century Fox World theme park will be a major push factor to GENM’s earnings when it opens its doors by 2016 to attract visitors from other theme parks in the region for its cool highland climate advantage. The new 1,300-room 3-star hotel would multiple visitor arrivals as this implies more than 10% room increase into its inventory. As the result, RWG would become another major theme park resorts in the Genting group besides Resorts World Sentosa in Singapore. We project the visitor arrivals at RWG to achieve 22m in 2014 from 20m in 2012. Elsewhere, the UK operation remains a wild card to GENM given its volatile earnings nature while earning for Resorts World New York City is expected to be sustainable. NFO is still good for yields. After the completion/aborting of corporate exercises by Magnum Bhd

(MAGNUM, OP; TP: RM3.68) and Berjaya Sports Toto Bhd (BJTOTO; OP; TP: RM4.30), the focus for the NFO players now is mainly on dividend income, yielding c.6% which is fairly attractive. We are now favouring BJTOTO over MAGNUM given the stable earnings for the former while the latter’s results tends to be volatile depending on luck factor. This is largely thanks to a well balanced games (4D and lotto games) offered by BJTOTO with relatively less volatile prize payout compared to MAGNUM’s more volatile luck factor due to its single 4D game. We still expect the NFO players to get their usual 20 special draws in 2014 with 2%-3% annual ticket sales. This means the earnings growth is less exciting but what attracts investors is their fairly decent dividend income.

GENTING is now the new sector pick. Given that the corporate exercise story for NFO is over while the casino segment is being fired up with a new market in the pipeline, we are now switching our preference to casino operators. Although the new casino market story such as in Japan is not a nearterm earnings booster, we believe it is price positive to the casino operators based on the Singapore’s gaming liberalisation experience. In view of this, GENTING is our new sector pick for the gaming space in addition to the improved prospects for CPO price which will benefit its plantation unit. While we like the GITP story, we believe GENM is currently trading at its fair value. We maintain our OUTPERFORM calls on BJTOTO and MAGNUM for their dividend yields.

Source: Kenanga