We still like gaming stocks for their attractive valuations, being the market laggards for at least the past 2-3 years. We believe current valuations, which are at multiple-year’s lows are unwarranted as they are in a matured and regulated industry while the GST fears could have been overdone. With the GST factor already reflected in the recent 2QCY15 results, there is likely no more weakness in top-line for the coming quarters, especially NFOs’ ticket sales. Thus, we continue to prefer NFO players over casino operators given the formers’ supernormal dividend yields of 6%-8% while for the latter, GENTING especially is affected by the lacklustre performance from GENS. We maintain our OVERWEIGHT rating for the sector while BJTOTO remains our TOP PICK.

NFO: it is always about valuation and yield. It was confirmed in the latest quarterly results that the NFO operators were absorbing the 6% GST which resulted in weaker turnover as well as bottom-line which was not unexpected and we had earlier trimmed our estimates on Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM3.72) and Magnum Bhd (MAGNUM, OP; TP: RM2.93) accordingly taking the implementation of 6% tax effective this April into account. With the weakness in the share prices, we believe the GST factor has already been priced in as these two NFO operators 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 high as 6%-8% which is among the highest on Bursa Malaysia.

Casino: Japanese Casino Bill delayed again? In Aug, it was reported that the Japanese ruling party of Liberal Democratic Party decided to cease pushing a bill to lift a ban on casinos during the on-going ordinary Diet session, which ended on 27 Sep, to concentrate efforts on the national security bills. The report also added that the Casino Bill will be handled at a planned extraordinary Diet session later. Again, to get the casino ready before the 2020 Tokyo Olympic, the next few months are crucial to get the bill passed by the parliament. Over in Korea, the construction of Resorts World Jeju is on track to open progressively from 2017 and to complete by 2019. Meanwhile, the management of Genting Singapore Plc (GENS, Not Rated) is expecting the authority to issue casino license(s) in 2H16. In Singapore, Resorts World Sentosa (RWS) lost its market leader status to its sole rival Marina Bay Sand for the second consecutive quarters with market share for VIP rolling chip volume falling further to 47% in 2Q15 to 48% in 1Q15. This was mainly attributable to the sharp decline in Chinese VIP arrivals. As such, GENS has switched its focus to the mass market since three quarters ago.

Looking to flattish 3QCY15 results. With the 2QCY15 results already reflecting the GST effect and with no seasonality strong quarter like 1Q, the upcoming 3QCY15 results season could see flattish top-lines. Nonetheless, GENM could continue to enjoy stable earnings on the resilient RWG’s earnings while the North American operations, especially RWNYC should be able to drive the US-based earnings higher while RWB’s new 300-room luxury hotel is expected to reduce its operating loss and breakeven in 2H15. However, the UK operations could continue to see tougher times due to its VIP-centric nature. Meanwhile, GENS’ prospects remain challenging given the decline of visitor arrivals from the high-roller 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 the gross level while the luck factor is the determining factor for bottom-line.

Our bet still on NFO; OVERWEIGHTing the sector. Again, there was no improvement in share price performance for gaming stocks in the past three months except for Genting Malaysia Bhd (GENM, OP; TP: RM4.41). In fact, they are currently trading lower than three months ago, at just 1%-10% from their 52-week lows with share prices falling 15%-22% in the past one year. Besides the fear of GST crimping bottomline, we believe this could also be attributable to their nonshariah- compliant status. 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. The latest quarterly results did show that the earnings declines were partly due to the absorption of 6% GST by the operators. However, the declines in share prices are more than the 6% which led us to believe that they could have bottomed out. Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM3.72) remains our TOP PICK for the sector. OVERWEIGHT for the sector maintained. 

Source: Kenanga Research - 6 Oct 2015