While we remain NEUTRAL on the sector, 2017 could be a year for the casino players given the Genting Integrated Tourism Plan expansion program for GENM and the liberalisation of the gambling industry in Japan. Having said that, GENM valuation is still unattractive while outlook of GENTING is dimmed by the challenging GENS numbers. However, 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 volatile earnings in the past quarters on weaker luck factor and declining ticket sales, for both BJTOTO and MAGNUM. Although these NFO stocks are at attractive valuations and supernormal yields, vulnerable luck factor remains the key concern.

Maintain NEUTRAL. 2016 was another lacklustre year for the gaming sector in term of earnings as well as share price performance except for Genting Malaysia Bhd (GENM, MP; TP: RM4.80) as share price rose 4.6% as it benefited from the GITP expansion program. Genting Bhd (GENTING, OP; TP: RM9.14) had a big swing in share prices which at one point surged >30% for the first four months of the year on optimism of a potential IPO of its 20.7%-owned TauRx Pharmaceuticals. However, the stock retreated sharply after the pharmaceutical unit failed the Alzheimer’s drug trail. In total, share price of GENTING rose 9% in 2016. Both share prices of Berjaya Sports Toto Bhd (BJTOTO, MP; TP: RM3.17) and Magnum Bhd (MAGNUM, OP; TP: RM2.57) fell 3% and 13.5% last year, respectively, which mirrored their lacklustre earnings results, which were hit by vulnerable luck factor coupled with declining ticket sales. In view of relatively less attractive valuation and outlook, we maintain our NEUTRAL stand on the sector.

Casino: focus remains on GENM; Japan to legalise casino. GENM should be able to see results from its GITP expansion program in 2017, with initial phases including the new casino floors which started at the end of last year. This coupled with the new 20th Century Fox World Theme Park to be launched by this year end, earnings for its non-gaming business will escalate to another new level. As such, we believe GENM is the key focus for gaming stocks in 2017. Meanwhile, the Japanese parliament finally passed the bill to legalise gambling in the country in mid-Dec after the proposal was put on hold for more than a year. This also means that the new casino is unlikely to open before the Tokyo Olympic 2020. This news brought excitement to the industry with casino operators such as MGM Resorts, Las Vegas Sands and Wynn Resorts indicating their interests. Based on past experience, such as gambling liberalisation in Singapore, casino stocks rallied during the bidding process. Thus, we expect the positive sentiment to replay in this Japan casino story. Within the Genting group, Genting Singapore plc (GENS, Not Rated) is the likely candidate to bid for the license. However, we believe it is too early to get excited about the new casino as it is still at early stage while there are numerous bidders bidding for this project.

NFO: where is the luck! The NFO players had mixed luck in 3QCY16 where MAGNUM rebounded strong by 152% sequentially in 3Q16 as prize pay-out ratio (EPPR) normalised to 65.9% from 73.0% in 2Q16 while BJTOTO faced higher EPPR of 63.6% in 2Q17 from the already high pay-out of 62.0% in 1Q17, against the theoretical level of 60%. On the other hand, we also noticed that both operators reported weaker YTD ticket sales on per draw basis by 3% for BJTOTO and 6% for MAGNUM from last year although MAGNUM posted 1% growth sequentially while BJTOTO still saw weakening NFO by 5% QoQ. With the declining ticket sales coupled with vulnerable luck factor, the earnings outlooks for these two operators are at stake. On the other hand, we see little impact from BJTOTO’s Vietnamese venture which was launched last July given its small effective equity stake of only 10.2% while the addition acquisition of 6.59m shares of the UK-based HR Owen (HRO) at GBP2.25/share by its 88.26%-owned unit Berjaya Philippines Inc, (BPI) taking BPI’s stake in HRO to 93.38% from 72.03%, has immaterial impact to BJTOTO given it is not its core business as the unit only contributed c.8% to the group’s operating profit in 1H17.

A better seasonally quarter ahead. In the latest 3QCY16 earnings reporting, the industry players reported mixed results where GENM’s 3Q16 beat expectations, thanks for tax incentive for GITP while MAGNUM’s 3Q16 showed improvement as luck factor normalised coupled with better ticket sales. However, weaker-than-expected GENS’ earnings continued to drag GENTING’s 3Q16 although the downside was mitigated by relatively good sets of GENM and plantation numbers. BJTOTO’s 2Q17 earnings were impacted again by luck factor and declining ticket sales. Looking ahead, we expect stronger revenue in the upcoming 4QCY16 results, especially for casino operators due to seasonality on year-end holiday while 1QCY17 will be also be a seasonally strong quarter for CNY effect for both casino and NFO players. Earnings driver in 2017 for GENTING will be the GENM’s GITP expansion program while GENS’ outlook remains challenging. CPO price is also expected to remain stable. The usual yearly 20-22 additional special draws will provide a boost to ticket sales for the NFO players. All told, luck factor remains the key determining factor to their bottom lines

Source: Kenanga Research - 5 Jan 2017