We believe the lacklustre share price performance of gaming stocks in the past year is partially attributable to concerns that the GST would erode their earnings. Except GENM, three other players saw their share prices tanking more than 10% in the past one year. In our opinion, the GST impact is already reflected in the share prices, especially for the NFO players as they are trading at multiple-years’ low with supernormal yields of 6%-7%. While the detailed mechanism of the 6% GST is still unknown, NFO players could see 6%-7% downside risk to their bottomline should they are unable to pass down the tax. We will pay more attention to the luck factor which is the determining factor of profitability. Having said that, casino operators will still be busy with refurbishment for GENM and new casino in Jeju for GENS. Meanwhile, GENTING remains our sector pick and BJTOTO as income stock pick. OVERWEIGHTing the sector.

GST the wildcard? While there is still no official announcement from the NFO players despite GST implementation on 1st April, news reports stated that the players are absorbing the 6% tax which could see a 6%-7% bottomline cut to NFOs, ceteris paribus. BUT we suspect the NFO players could be passing the GST to punters via lower prize payouts. While this move essentially preserves profitability, the lower prize payouts could lower ticket sales as punters opt for illegal operators. We maintain our ideal case that one of the existing NFO taxes is converted/replaced by GST since the players are already charged with multiple taxes, including gaming tax besides the usual corporate tax.

NFO: limited earnings growth but it is valuations that matter. Given that the gaming sector is a highly regulated and matured industry, earnings prospect remains unexciting and we expect ticket sales to grow at 2%-3% annually while the luck factor is the determining factor for 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: RM3.07) introduced a new game 4D Jackpot Gold which is positive to the other NFO operators as they may also 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.

Casino: still not smooth sailing. After missing the timeline of passing the Casino Introduction Bill by the Japanese Parliament in 2014 due to the snap election which was held in mid-Dec 2014, it was reported that the pro-casino lawmakers will resubmit by 31 Mar 2015 a bill to legalise gambling with the objective of getting it passed this year. Given the idea of getting the casino ready before the 2020 Tokyo Olympic, the next 12 months is crucial to get the bill passed by the parliament. Meanwhile, the Resorts World Jeju had its ground breaking in Feb 2015 and is on track to open progressively from 2017 and to complete by 2019. As such, Japan and Korea will be the potential new earnings drivers to Genting Singapore plc (Not Rated) while the focus for Resorts World Sentosa (RWS) is to grow the mass market with less focus on VIP as Chinese visitor arrivals are dropping. In fact, RWS saw a sharp decline of 17% QoQ in rolling chip volume in 4Q14 with a smaller market share, for the first time since 4Q13, sharply to 54% from 61% in 3Q14. Interestingly, Genting Malaysia Bhd (GENM, MP; TP: RM4.30)’s Resorts World Genting reported higher EBITDA of RM657.3m than RWS’s RM506.0m in 4Q14.

Attractive valuations; still OVERWEIGHT. Despite resilient earnings, the gaming stocks have performed badly in the past year which saw their share prices contracting by 11%-12% in the past one year, except GENM, which dipped 2% over the year. YTD, MAGNUM, GENTING and Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM4.25) fell 2%, 3% and 5%, respectively, while GENM gained 3% over the same period. In all, valuations for both casino operators and NFO players are fairly attractive at 15x-17x for the former and 12x-14x for the latter. 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 Research - 3 Apr 2015