We like gaming stocks for their attractive valuations, being the market laggards in the past 4-5 years despite attractive valuations. There are themes such as GITP and the recovery of GENS to support the casino operators while NFO players are seeing stabilising of ticket sales following five long years of depressed declining trend coupled with normalisation of luck factor. GENTING looks fairly attractive for its deep valuation trading at 43% discount to SoP valuation while the NFO players at their multipleyear’s low of 10x-12x earnings multiples with one of the best yields at 6%-7%. Having said that, we reckon that the luck factor remains vulnerable to the NFO players while the IBR tax claims on MAGNUM may take time to settle, an overhang to its share price in the immediate term. In all, we maintain the Gaming Sector at OVERWEIGHT with GENTING being our TOP PICK for the sector.

Casino: focus remains on GENM and Japan. We continue to believe that 2018 is an exciting year for the casino operators as the Genting Integrated Tourism Program (GITP) expansion story is timely, bearing fruits for Genting Malaysia Bhd (GENM, OP: TP: RM5.80), thus indirectly benefiting parent

Genting Bhd (GENTING, OP; TP: RM10.65) as well. In fact, the non-gaming segment has witnessed improving results in the past few quarters following the opening of SkyAvenue mall early last year and Genting Plantation Bhd’s (GENP, OP; TP: RM10.75) Genting Highland Premium Outlet last June. In addition, there is the opening of the brand new 20th Century Fox Theme Park by the end of the year. This will escalate its non-gaming business to another new level, making GENM the key focus for gaming stocks in the next 1-2 years. On the other hand, 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 Genting Singapore plc (GENS, Not Rated) and GENTING based on past experience in the Singapore back in 2006. It was reported that the introduction of the long-awaited IR Bill is likely to be delayed until at least this month, which means the chance of passing the bill this year could be slimmer. However, market talks had it that the number of integrated resorts (IR) locations could increase to 5-6 from two currently.

NFO: ticket sales downtrend abated? With share prices falling by more than half of their values in the past five years, the selling pressure on NFO players had somewhat abated in the past six months given that the declining NFO trend had somewhat found its bottom in the past year. In fact, Magnum Bhd (MAGNUM, OP; TP: RM2.20) registered its first annual earnings growth in FY17 since 2012 while based on 9M18 earnings, Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM2.65) should likely to see its first annual earnings growth in three years as well in FY18. In addition, since FY12, BJTOTO had only reported one year of earnings improvement in FY15. The latest improved results were supported by stabilised ticket sales coupled with the normalisation of luck factor. Therefore, the worst could be over for the NFO players. Furthermore, these two stocks also offer above-average dividend yields of 6%-7%. On the downside, luck factor remains the key determining factor for forward earnings while the IBR tax penalty of RM476m is an overhang issue on MAGNUM and could pressure BJTOTO as well.

A seasonally better quarter ahead. In the latest 4QCY17 earnings reporting, the industry players reported a mixed bag of results with GENTING’s 4Q17 and BJTOTO’s 3Q18 disappointing results, which were largely due to higher taxation. We are not alarmed as this was non-operating in nature while in fact, all four companies reported improved or at least stabilised business volume, which is good signs. Going forth, the upcoming 1QCY18 should be a seasonally strong quarter for the gaming companies on CNY-effect on better business volume. This is especially so for GENM following the launch of non-VIP floor at SkyCasino last March and the VIP floor in end-3Q17. On the other hand, the CNY-effect was seen in both BJTOTO and MAGNUM, which reported higher average NFO ticket sales per draw by 4%/12% sequentially in last year’s CNY-led quarter. Meanwhile, 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.

Maintain OVERWEIGHT. Except MAGNUM which share price rose 5.17% in the past three month, all the gaming stocks saw their share prices falling between 3%-13% against the FBMKLCI’s +3.71%. This was attributable to the disappointing results from GENTING (-5.11%) and BJTOTO (-2.68%) but we were surprised with the sharp decline in GENM (-12.97%) despite improving business volume. In fact, GENTING and GENM are trading at 43% and 15% discounts to their SoP valuations against their 10-year average discount of 46% and 21%, respectively. With the GITP expansion and the recovery of GENS, the valuations for these two stocks appear fairly attractive. Meanwhile, judging from the stabilised ticket sales and share price movement, we have reason to believe that the NFO stocks should have bottomed out. In addition, these NFO stocks offer attractive yields of 6%-7%. As such, we are maintaining the Gaming Sector at OVERWEIGHT with Casino operator our preferred sub-sector pick and GENTING as our TOP PICK for the sector.

Source: Kenanga Research - 4 Apr 2018