Genting Singapore Plc (GENS) has announced its maiden North-East Asia integrated resort (IR) project in Korea, which will be jointly developed and operated with a Chinese partner. The party does not stop here as the impending Japanese Gambling Bill, likely to be passed through in mid-2014, will continue to excite the market. However, NFOs continued to come under pressure, which sent their share prices to multiple-year low. Inconsistent luck factor at MAGNUM and concerns of the over-diversified BJTOTO’s Filipino unit are some of the factors affecting the sector. However, in our view, the share price weakness is unwarranted given their earnings profile and highly regulated business, which is backed by attractive dividend yields. Nevertheless, our preference is still with casino operators given their more exciting expansion plans compared to the less-exciting earnings growth of the NFO players. GENTING remains our TOP PICK for the sector for its North Asia story and also on improved prospects for its plantation exposure on better CPO prices.

4QCY13 results largely in line. All gaming stocks reported decent earnings report cards, which were within expectations except Magnum Bhd (MAGNUM, OP; TP: RM3.59) which was hit by yet another poor luck factor. MAGNUM has been experiencing volatile earnings all these while given its single product 4D game which tends to swing its luck factor dramatically whereas its rival Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM4.31)’s earnings certainty is better due to its less volatile luck factor due to its multiple games, including 4D and lotto. Thus, BJTOTO’s 3Q14 estimated prize payout ratio (EPPR) of 58.5% was within the average range of 58%-60%. Meanwhile, Genting Bhd (GENTING, OP; TP: RM12.81)’s 4Q13 results were largely in line with Genting Singapore Plc (GENS, NOT RATED), registering 24% QoQ decline in earnings due to lower business volume while Genting Malaysia (GENM, MP; TP: RM4.39)’s 4Q13 met expectations with bottom-line improving 2% QoQ.

Casino: The heat has just started. Ahead of the Japanese who are getting their Casino Bill passed by the parliament in mid-2014, GENS already made its foray into the North Asia market in Feb-14 by setting up a 50:50 JV with China-based Landing International Development Ltd to build an USD2.2b integrated resort (IC), which will be opened in 2017, in Jeju Island, Korea. Although there are already 17 casinos in Korea, of which eight of them are in Jeju Island, we believe the market there is still at a growth stage. Despite five new casinos in the past ten years, the total gaming revenue in Korean was still growing, at 18.6% CAGR over 2000 to 2011. The added advantage for Jeju Island, which is now a Free International City, is its policy, which allows Chinese visitors with no travelling visa to visit the island, the only place in Korea with such policy. This provides the mainland Chinese an alternative other than Macau for gambling activities.

NFO: Compelling valuation with attractive yields. Since the completion/abortion of their corporate exercise, both MAGNUM and BJTOTO had come under selling pressure, especially the latter which share price is currently at multiple-year low. They are now trading at CY15 PERs of 12x-13x which is fairly attractive given their earnings profile and highly regulated industry. The declining valuations are partly attributed to volatile earnings of MAGNUM and the on-going diversification of BJTOTO’s Filipino unit, Berjaya Philippines Inc (BPI, NOT RATED). We see little concern over MAGNUM’s earnings given that its single 4D game tends to have volatile luck factor while the contribution of BPI is still immaterial to BJTOTO. As such, we believe the current low valuations for both NFOs are unwarranted. In addition, they also offer yields as high as 6%-7% which is among the highest on Bursa Malaysia.

GENTING is still our sector pick. While earnings growth is expected to be less exciting for NFO, income seeking investors may find value in BJTOTO and MAGNUM given their attractive yields at valuations, which are at multiple-year low. While both have OUTPERFORM calls, we prefer BJTOTO over MAGNUM given the former’s fairly stable quarterly earnings over the latter. Having said that, casino operators are still our PREFERRED choice for their on-going expansion plans. GENTING is our gaming sector pick for the new casino market story, such as in Korea and Japan. On the other hand, while we like the GITP (Genting Integrated Tourism Plan) story, we believe GENM is currently trading at its fair value.

Source: Kenanga