The industry players are expected to benefit from the 3-month tax-holiday of zero-rated GST in June to August as it offers short-term earnings upticks given that previously the gaming companies absorbed the 6% GST. However, it is still unclear whether the industry players will be charged with the reintroduced SST in September, which was not incurred prior to the GST implementation. This was immediately reflected in their share price movements post GE14 (especially for NFO players), but we still believe they are not fairly priced in yet. Meanwhile, the casino sub-sector should start to bear fruits from the GITP expansion story while the new Japan market should excite the casino players further. GENTING looks fairly attractive for its deep valuation trading at 46% discount to SoP valuation while the NFO players are at attractive levels of 12x-14x earnings multiples with one of the best yields at 6-7%. In all, we maintain the Gaming Sector at OVERWEIGHT with GENTING being our TOP PICK for the sector.

To benefit from 3-month tax-holiday; maintain OVERWEIGHT. Despite sluggish market performance following the change of federal government, the gaming companies managed to outperform the overall market, an event not seen for years, in the past three months. This was especially for NFO players, which had underperformed the market for the past five years as they posted strong share price rally of 12-14% against FBMKLCI’s -8.31% in 2Q18. This was attributable to the 3-month tax-holiday of zero-rated GST in June to August as it offers short-term earnings upticks given that previously the gaming companies absorbed the 6% GST. However, it is still unclear whether the industry players will be charged with the reintroduced Sales & Service Tax (SST) in September, which was not incurred prior to the GST implementation. Overall, we continue to prefer the casino sub-segment on the exciting Genting Integrated Tourism Program (GITP) expansion story with Genting Bhd (GENTING, OP; TP: RM10.85) being our preferred sector pick to benefit from GITP as well as new Japan market story.

Casino: focus remains on GENM and Japan. We continue to believe that 2018 is an exciting year for the casino operators as the GITP expansion story is timely to bear fruits for Genting Malaysia Bhd (GENM, OP: TP: RM5.75), thus indirectly benefiting parent GENTING 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. Meanwhile, the Japanese Diet’s Lower House on 19 June had passed the Integrated Resorts Bill to allow casino gambling in the country. Under the Bill, IRs will be restricted to only three sites with locals and foreign residents of Japan having to pay JPY6,000 admission fee for visit the IR and are allowed up to three visits per week, and capped at a maximum 10 visits per month.

NFO: worst should be over. Share prices of Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM2.65) and Magnum Bhd (MAGNUM, OP; TP: RM2.30) rallied strongly after the change of federal government last month, which saw their share prices rising 12.39% and 14.21%, respectively, in the past three months. This was on the back of the removal of GST to be replaced by SST in September as the tax holiday from June to August should see earnings uptick as the players no longer need to absorb the 6% GST. Meanwhile, the new government has mentioned that it will review the previous regime’s IBR tax penalty to company, this has somewhat provided relief to MAGNUM, which was slammed with RM476m tax penalty, which has been an overhanging issue for months. Operational-wise, both NFO players registered stable ticket sales for more than a year and this leads us to believe that the ticket sales downtrend should have bottomed out. In fact, MAGNUM registered its average ticket sales per draw YoY growth in 1Q18 for the first time since 1Q12 while BJTOTO also saw its first average ticket sales per draw annual growth in FY18 for the first time in six years. On the other hand, MAGNUM managed to report stable luck factor, which was at its theoretical level of 66% in the past year, BJTOTO’s earnings were hit by poorer luck factor in the recent quarters which came above its theoretical payout level of 60%. Having said that, these two stocks offer above-average dividend yield of 6-7%, which is good for income-seeking investors.

An off-peak season quarter ahead. In the latest 1QCY18 earning reporting season, the industry players reported a mixed bag of results with GENTING’s 1Q18 results beating expectations on stronger-than-expected GENS’ earnings recovery, but GENM’s 1Q18 earnings were hit by poor luck factor and low business volume at the VIP-centric UK operations while the local operations posted lower hold percentage despite higher business volume. While MAGNUM’s 1Q18 results were on track, BJTOTO’s 4Q18 missed expectations on luck factor. Going forth, the upcoming 2QCY18 results should be a weaker sequential quarter after a strong CNY-led 1QCY18 for the players which should see declining business volume. Nonetheless, the zero-rated GST should partly mitigate the downsides. All told, luck factor remains the key determining factor to their bottom lines.

Source: Kenanga Research - 4 Jul 2018