Over the past years, gaming stocks, except GENM, have generally underperformed, even the already lacklustre FBMKLCI with share prices falling 13%-19% which are near to their 52-week lows. We believe the GST fear has been overly done, especially for NFO players, and their share prices could have bottomed. The NFO players are currently trading at their multiple-years’ lows with supernormal dividend yields of 6%-8% while GENTING is now at its 52-week low mainly due to lacklustre performance from GENS. So far, GENM is one of the better performers in line with the market. GENM’s earnings remain resilient, which is domestic-centric with improving North America operations. In all, we are now switching our preference to the NFO players over the Casinos with BJTOTO as our new TOP PICK. GENTING remains our sector pick and BJTOTO as income stock pick. OVERWEIGHTing the sector.

Prefer NFO now; still OVERWEIGHT. Except Genting Malaysia Bhd (GENM, MP; TP: RM4.52), all three other gaming stocks which underperformed the already lacklustre FBMKLCI. In fact, these three stocks are currently trading just 0%-4% from their 52-week lows with share prices falling 13%-19% in the past one year. We believe this could be attributable to two reasons; (i) fear of GST crimping bottomline, and (ii) these stocks are not shariah-compliant. While the market is mainly dominated by shariah funds, non-shariah funds should consider investing in these stocks given their attractive dividend yields, especially the NFO players. In addition, the declines in share prices are more than the 6% GST which led us to believe that share prices could have bottomed. Hence, we switch our preference from Casino operators to NFO players given the latter’s attractive yields.

Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM3.72) is now our TOP PICK for the sector. Maintain OVERWEIGHT. NFO: let’s focus on valuation and yield. While there is still no official announcement from the NFO players despite the GST already implemented from 1 April, news reports stated that the players are absorbing the 6% tax. We shall see the actual impact in the upcoming 2QCY15 results which will be released in August later. In fact, we had already trimmed BJTOTO’s and

Magnum Bhd (MAGNUM, OP; TP: RM2.93)’s forward earnings by 6%-8% during the recent quarterly results review after adjusting for the GST impact. We believe the GST factor has already been priced in as these two NFO players are trading at their multiple-year lows especially BJTOTO at 12x earnings multiple. Given that the gaming sector is highly regulated and a 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. However, one should also look into the attractive yields that are as as high as 6%-8% which is among the highest on Bursa Malaysia.

Casino: still waiting for new markets. Finally, in Japan, the Casino Introduction Bill has been submitted to the Japanese Parliament in end-April by the pro-casino lawmakers to legalise gambling with the objective of getting it passed before July or August when the current parliamentary session is expected to end. Again, given the idea of getting the casino ready before the 2020 Tokyo Olympic, the next 6-9 months is crucial to get the bill passed by the parliament. Over in Korea, there is not much update from three months ago when Resorts World Jeju had its ground breaking in February and the management of Genting

Singapore plc (GENS, Not Rated) believes that this new venture is on track to open progressively from 2017 and to complete by 2019. Meanwhile, back in Singapore, GENS’ Resorts World Sentosa (RWS) lost its market leader status to its sole rival Marina Bay Sand for the first time in six quarters with the market share for rolling chip volume falling to 48% in 1Q15 from 54% in 4Q14. This was mainly attributable to the sharp decline in Chinese VIP arrivals. As such, GENS is switching its focus to mass market since two quarters ago. Looking to a seasonally weak 2Q. With the implementation of GST and the seasonally strong 1QCY15 on CNY effect, the upcoming 2QCY15 results season could deliver weaker top-lines. Nonetheless, GENM could continue to enjoy stable earnings on the resilient RWG earnings while the North American operations, especially RWNYC should be able to drive the US-based earnings higher while RWB, which is still in its early day of operations may face challenges with expectation to break even in 2H15. Meanwhile, GENS’ prospect outlook remains challenging given the decline of visitors arrivals in highroller segment from China. For NFO segment, earnings prospect remains unexciting given that it is a highly regulated and matured industry. We expect ticket sales to grow at 2%-3% annually at gross level while the luck factor is the determining factor for bottomline. In all, we believe the NFO players should still be able to get the additional 20 special draws each in 2015 to boost NFO ticket sales.

Source: Kenanga Research - 2 Jul 2015