We are upgrading the Gaming Sector to OVERWEIGHT from NEUTRAL as 2018 will be an exciting year for the casino operators while selling pressure on NFO should bottoming out following the improvement in ticket sales coupled with better luck factor. In fact, 2018 should be a fruitful year for GENM as the GITP expansion plan starts to bear fruit while the recovery of rolling chip volume at GENS and the new market in Japan should benefit GENTING more. On the other hand, NFO players saw their share price stabilising in the past three months, thanks to falling ticket sales finally bottomed out with improved luck factor, after a long five years of depressed performance. Having said that, we reckon that the luck factor remains vulnerable while the IBR tax claims on MAGNUM may take time to settle, an overhang to its share price in the immediate term. Upgrade the sector to OVERWEIGHT. All the gaming stocks have OUTPERFORM calls now following the recent upgrade in GENM after its share price plunged on disappointing 3Q17 results. Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM2.70) and Magnum Bhd (MAGNUM, OP; TP: RM2.17 are still straggling to crawl out from their multi-year low valuations, but the selling pressure has somewhat abated as the falling ticket sales had stabilised. With the stabilizing of ticket sales coupled with luck factors, the expected 6%- 8% yields look attractive. Meanwhile, the share price retracement makes Genting Malaysia Bhd (GENM, OP; TP: RM5.80) and Genting Bhd (GENTING, OP; TP: RM11.40) attractive which are backed by the exciting Genting Integrated Tourism Plan (GITP) expansion story, the recovery of Genting Singapore plc (GENS, Not Rated) and the new market in Japan. As such, we are upgrading the Gaming Sector to OVERWEIGHT from NEUTRAL previously with Casino operator our preferred sub-sector with GENTING as our TOP PICK for the sector.

Casino: attractive valuation at GENTING. We believe 2018 would be an exciting year for the casino operators as the GITP expansion story should be in time to bear fruit while the recovery of rolling chip volume across the causeway should benefit GENTING. In addition, the impending legalising of casinos in Japan should boost sentiment for both GENS and GENTING based on past experience in the Singapore IR bidding back in 2006. Meanwhile, GENS had raised JPY20b Samurai Bond in Japan in October following the establishment of a branch there. This is earmarked for preparatory works in anticipation of the new casino there. This shows that its keen interest in this new market. With the election over, the government is expected to table the bill next summer in 2018. Given this, we believe GENTING’s current huge discount of 45% to its SoP valuation, which is close to 10-year discount of 47% is unwarranted. In fact, this is also much lower than its 5-year average discount of 37%.

NFO: share price and ticket sales bottoming? After five years of falling share prices, the selling pressure on NFO players had somewhat abated in the past three months coupled with better luck factors, which had helped to boost earnings. The selling was partly attributed to the implementation of GST as the NFO players have to absorb in its revenue line as well as the IBR tax claim for MAGNUM, while the depressing ticket sales were primarily due to competition from the illegal operators which offer better flexibility and higher prize payout. With share prices contracted to half their values in the past five years coupled with price stabilisation in the past three months, stabilising ticket sales and improved luck factor, we believe the selling could have bottomed out. In addition, these two stocks also offer above-average dividend yields of 6%-8%.

A CNY boosting quarter in 1Q18. Both casino and NFO are heading into the seasonally strong CNY in 1Q18, which should enjoy better business volume. For casino operators, especially GENM which may see some volume upsides following the launch of non-VIP floor at SkyCasino last March and the VIP floor in end-3Q17. Elsewhere, earnings from North America for GENM also expect to show further improvement, especially for Resort World New York. Meanwhile, GENS has shown improvement of business volumes in the recent quarters. Although this is still far from the peak, it should have bottomed out. All these developments at GENM and GENS should benefit GENTING directly. For the NFO players, while the declining ticket sales trend seems to be abating, luck factor remains a wild card to profitability. Having said that, the usual yearly 20-22 additional special draw will lend support to its overall ticket sales base in 2018 for the NFO players. Meanwhile, the IBR tax claim for MAGNUM may take time to settle, which would be an overhang to its share price in the immediate term.

Source: Kenanga Research - 3 Jan 2018