We maintain our NEUTRAL call on the sector given its unattractive valuation as well as operating numbers that are not improving. For casinos, focus will switch to GENM as the early phase of GITP is ready in 2H16 and we like the stock for its resilient home turf operations while earnings for GENS remains challenging as signs of recovery remain unclear. In any case, GENTING will be the clear beneficiary should a meaningful recovery occur at GENS and further improvement is seen in GENM. On the other hand, NFO operators witnessed another volatile quarter on weaker luck factor and lower ticket sales post-CNY season in the preceding quarter for both BJTOTO and MAGNUM. However, these stocks are attractive, especially MAGNUM, which is trading at its multiple-year low valuations while offering supernormal yield too.

Maintain NEUTRAL. There are no changes in our sector rating of NEUTRAL for now given the unattractive valuations while the operating numbers are also not improving. However, we had made two changes in stock calls in the past three months where we upgraded Genting Bhd (GENTING, OP; TP: RM9.32) to OUTPERFORM as the stock had fallen 21% since our last downgrade in early April after its 20.7%-owned TauRx Pharmaceuticals failed the Alzheimer’s drug trial. Meanwhile, we cut Berjaya Sports Toto Bhd (BJTOTO, MP; TP: RM3.40) after its share price rallied 16% since June prior to the official launch of its 10%-owned Vietnam NFO operations in July. Meanwhile, Magnum Bhd (MAGNUM, OP; TP: RM2.78) was maintained as an OUTPEFORM for its attractive yield while Genting Malaysia Bhd (GENM, MP; TP: RM4.78) was retained at MARKET PERFORM as its 2H16 is expected to be better in view of the opening of early phase of GITP.

A better seasonally quarter ahead. In the past three months, these four gaming companies have had mixed share price performances with GENTING and BJTOTO rallying as abovementioned while share prices for MAGNUM and GENM were fairly flattish. Earnings-wise, 2QCY16 reporting season showed a mixed bag of results with downward bias as the continued weak results from Genting Singapore Plc. (GENS, Not Rated) dampened GENTING earnings by 33% QoQ while luck factor at MAGNUM deteriorated again after a normalised luck factor in 1Q16. Meanwhile, GENM’s results were in line, which saw solid numbers across all geographical areas, especially Genting UK which posted its 2nd straight quarter of strong earnings after a successful change in business strategy. However, BJTOTO reported a disappointing 1Q17 which saw net profit plunging 44% QoQ due to poorer luck factor coupled with higher taxation. Having said that, while the upcoming 3QCY16 results are expecting to be flattish on the top line, these companies, especially the casino players are set to see stronger revenue in 4QCY16 due to seasonality. All told, luck factor remains the key determining factor to their bottom-line.

Casino: focus switching to GENM. GENTING’s share price has been hovering at the current price level of RM8.00 since three months ago after it took a beaten following the failure of TauRx’s drug test while the major contributor Genting Singapore Plc. (GENS, Not Rated) continued to post disappointing earnings. Having said, we believe share price of GENTING is appeared to be attractive at current level while GENS’ earnings are likely to be bottoming, which is at historical low of SGD6.2m, the lowest since end-2010. In fact, the total market VIP volume in Singapore plunged 26% QoQ to SGD15.9b in 2Q16. Having said, we believe the depressing business volume could be bottoming, but we may not see convincing recovery anytime soon. In view of this, investors are likely switching their focus to GENM given that its defensiveness in local earnings while its UK casinos showed strong numbers in 1H16 after a successful turnaround plan. Besides, the North American operations also showed encouraging numbers. In addition, the RM10b GITP is opening its early phase in 2H16, including new gaming floor will acts as new price and earnings catalysts. The recent disposal of its entire 16.9% stake in Genting Hong Kong is a good move for GENM as this investment did not contribute much return while the proceeds can be better utilised for GITP expansion.

NFO: luck factor remains as the key determining factor to bottom line. After a solid turnaround in luck factors, both BJTOTO and MAGNUM reported yet again another weak set of quarterly results in their recent earnings releases as the bad luck factor took a toll on their earnings. BJTOTO saw its 1Q17 earnings plunging 44% QoQ after a 4-ppt hike in luck factor while MAGNUM’s 2Q16 plummeted 68% sequentially as luck factor jumped 8-ppt. In addition, the earnings were lower partly due to the high-base CNY effect in the preceding quarter thus BJTOTO’s 1Q17 ticket sales fell 5% while MAGNUM’s 2Q16 ticket sales contracted 17% over the quarter. Nonetheless, with the special draws, which are expected to be at 20-22 draws a year, ticket sales should be at least be able to sustain on a yearly basis. Having said, luck factor remains as the key determining factor to the NFO’s bottom line. On the other hand, the recently launched Vietnamese NFO operation is likely to have a less meaningful impact to BJTOTO given its small effectively equity stake of only 10.2%.

Source: Kenanga Research - 6 Oct 2016