Key issue in 2015 is the implementation of GST in April, which could prove impactful to earnings should the players are unable to pass down the 6% tax. In our opinion, one of the existing taxes will be replaced by GST since they players are already being charged with multiple taxes. A totally new tax to the existing tax structure will have negative implications on the sector, eventually affecting government tax revenue. Besides GST, the luck factor is still the determining factor to bottom line. We are not overly concerned about the slowdown in discretionary spending given that based on past record; at least, NFO still posted growth in ticket sales. Having said that, casino operators will still be busy with refurbishment for GENM and new casino in Jeju for GENS in 2015. We believe the NFO players will still get their usual 20 special draws in 2015 with overall unexciting 2%-3% growth in ticket sales. We maintain OVERWEIGHT on the sector with GENTING as sector pick and BJTOTO as income stock pick.

Casino: no smooth sailing. The timeline of passing the Casino Introduction Bill by the Japanese Parliament in 2014 hit a snag due to the snap election which was held in mid-Dec 2014. Positive news is that PM Shinzo Abe managed to win the election with a slightly improved majority. This should put the legalisation of casino back on track. Given the idea of getting the casino to be ready before the 2020 Tokyo Olympic, the next 12-18 months is crucial to get the bill being passed by the parliament. Meanwhile, as Genting Malaysia Bhd (GENM, MP; TP: RM4.30)’s two bids for new casino licenses in New York State were unsuccessful after the authority decided not to issue any casino license in the Orange County in which GENM had proposed; its current base RWNYC is a good platform for future new license when opportunity arises.

NFO: limited earnings growth but it is about valuation. Given that the gaming sector is a highly regulated and matured industry, earnings prospect remains unexciting which we expect ticket sales to grow at 2%-3% annually while the luck factor is the determining factor to bottomline. We believe the NFO players should still be able to get the additional 20 special draws each in 2015 to lend support to NFO ticket sales. In Nov 2014, Magnum Bhd (MAGNUM, OP; TP: RM3.31) introduced a new game 4D Jackpot Gold which is positive to the other NFO operators as they might get new games in the future. However, in our opinion, impact to bottomline may not be significant given the complicity of the game when the regular punters prefer the simple 4D games or the existing 4D Jackpot game. Despite the less exciting earnings growth, valuations for both NFO players are very attractive as they are trading at their multiple-year lows of 12x-13x. In addition, they also offer yields as high as 6%-7% which is among the highest on Bursa Malaysia.

GST the wildcard? Although the implementation of GST is around the corner, it is still unclear how the 6% tax will be charged. Key risk is if the industry players are unable to pass on the GST to the consumer as this would impact the bottomline. Currently, the players are already being charged with multiple taxes, including gaming tax besides the usual corporate tax. As such, the ideal case would be one of the existing taxes being converted or replaced by GST. We believe this is the likely case as the impending GST is to replace existing taxes paid for goods purchase/services in certain sectors currently, for instance, the 6% government tax. Another likely positive case for NFO players would be passing the GST to punters by lowering down the prize payout. However, the likely implication could be lower ticket sales as punters may opt for illegal operators. Worst case for both casino operators and NFO players is they are unable to pass down the 6% tax to the punters.

A sector to look for during bad times? In time of slowdown in the economy, we believe this sector may be spared from the effects of slower discretionary spending, especially for the NFO segment, as punters would continue trying their luck hoping for a windfall during hard times. We notice that even during the 2008 financial crisis, both MAGNUM and Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM4.25) still registered 5.7% growth in ticket sales while the growth in 2009 was flattish at +0.2%. As such, the outlook for the sector is not that pessimistic compared to other sectors. In all, valuations for both casino operators and NFO players are fairly attractive as current level following the recent market sell down. We continue to OVERWEIGHT the sector with Genting Bhd (GENTING, OP; TP: RM11.53) remaining as our TOP PICK given the exciting new casino market story. For income seeking investors, we PREFER BJTOTO over MAGNUM given its fairly stable quarterly earnings trend over the latter.

Source: Kenanga