We are now entering the final quarter of the year which is usually a busy time for the casino players due to year-end festive season. Given the compelling valuations for both casino and NFO players, we continue to OVERWEIGHT the sector with GENTING remaining as our sector pick for its offshore expansion story. Although both NFOs offer attractive yield, we prefer BJTOTO over MAGNUM given its fairly stable quarterly earnings trend while the latter’s results were affected by volatile luck factor. Operationalwise, after Las Vegas, GENTING Group is focusing on new casinos in the New York State where the group has put up three bids which should continue to excite the market. In all, while we continue to PREFER casino play for their exciting expansion story, income seeking investors should include NFO stocks in their investment portfolio given the sustainable attractive dividend yields.

2QCY14 results disappointing. All four gaming stocks reported weaker results with Genting Bhd (GENTING, OP; TP: RM11.84) and Genting Malaysia Bhd (GENM, MP; TP: RM4.41) coming below expectations while two other stock coverage were broadly in line. GENTING’s 2Q14 results were hit badly by disappointing GENM’s results and weakening CPO prices. In fact, almost all Genting Group of casinos, such as Malaysia, Singapore and UK, faced poorer luck factor which saw their profit margins crimped. On the flipside, RWS continued to expand its VIP market share at the expense of MBS while its North American operations, RWNYC and RWB reported improved results thanks to higher business volume. While Magnum Bhd (MAGNUM, OP; TP: RM3.59) recorded poorer luck factor, Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM4.25)’s 1Q15 results were hit by weaker-than-expected NFO ticket sales due to lesser draw day despite normalised luck factor.

Casino: The heat is still on. After unveiling details of Resort World Las Vegas (RWLV) in 2Q14, the Genting group was busy putting up three bids, competing with another 14 bids from other parties, for new casino licenses in the New York state in end-June. Two bids were submitted via GENM’s indirect subsidiary, RW Orange County LLC to build casinos, one in Tuxedo worth USD1.5b and another one in Montgomery, both in Orange County. On the other hand, the Lim family controlled Nasdaq-listed Empire Resorts Inc put up a proposal to build a USD1b casino in the Sullivan County. Currently, the New York Gaming Facility Location Board is reviewing the 17 applications for four casino licences in three regions with outcome expected in Oct-Nov. As such, the Genting group is expected to be kept busy with bidding process in Japan and USA within the next 6-12 months.

NFO: still compelling valuation with attractive yields. BJTOTO continued to edge up MAGNUM in term of market share in 2QCY14 as the former had RM72.2m in extra NFO ticket sales over the latter compared to RM36.6m in the preceding quarter despite weaker sales due to CNY factor in 1QCY14. On the other hand, the two NFO stocks continued to perform poorly in the past three months where BJTOTO fell 3% over the quarter while MAGNUM dipped less than 1% over the period. This is against the performance of FBMKLCI which dipped more than 2% over the same period. In all, we still believe that the NFO stocks are trading at compelling valuation of 13x-14x which is at multiple-year lows. This is fairly attractive given their defensive earnings profile and highly regulated industry. In addition, they also offer yields as high as 6%-7% which is among the highest on Bursa Malaysia.

Still OVERWEIGHTING the sector with GENTING as our 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 current 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 trend over the latter. GENTING remains as our TOP PICK for the sector given the exciting new casino market story, such as Korea and Japan, as well as the new RWLV casino. On the other hand, while we like the GITP (Genting Integrated Tourism Plan) story and the potential new casino in New York State, we believe GENM is currently trading at fair value.

Source: Kenanga