The industry players are heading to year-end peak season, especially for casino operators, towards better business volume, which is positive for sentiment. Meanwhile, the reintroduction of SST will have neutral impact to earnings as it is a replacement of the 6% GST which the players absorbed previously. On the flipside, the cut in special draws for the NFO is mildly negative as the earnings impact could be minus 2%-3% should the special draws are reduced to 10 days from 22-25 days currently. In all, we believe that with the exciting GITP expansion story, new Japan casino market, and the subsiding NFO ticket sales downtrend, the Gaming Sector, which has been out of investors’ radar in the past five years, is worth a re-look. We remain OVERWEIGHT on the sector with the casino subsector as our preferred pick for its growth story while income-seeking investors may find NFO players as a good investment avenue for attractive yield of 6%-7%.

Casino: focus to remain on GENM and Japan. Although we are in the final quarter of 2018, we continue to believe that 2018 is an exciting year for casino operators which could extend to 2019 as the Genting Integrated Tourism Program (GITP) expansion story is timely to bear fruits for GENM (OP; TP: RM5.75), thus indirectly benefiting parent GENTING (OP; TP: RM10.85) 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 GENP’s (OP; TP: RM10.75) Genting Highland Premium Outlet last June. In addition, there is the opening of the brand new 20th Century Fox Them Park albeit delayed to 1H19 from this year-end. This will propel 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 Japanese Diet in July enacted the Integrated Resorts (IR) Implementation Bill, which should boost sentiment for both GENS (Not Rated) and GENTING based on past experience in Singapore back in 2006. 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 and are allowed up to three visits per week, and capped at a maximum 10 visits per month.

NFO: worst should be over. After a good run in 2QCY18 due to the news of 3-month tax holiday in June-August, share prices of BJTOTO (OP; TP: RM2.65) and MAGNUM (OP; TP: RM2.25) has since retraced as profit-taking kicked in with the reintroduction of SST in September. However, we are not concerned as it has a neutral impact to the NFO’s bottomline as the 6% tax is just a replacement of 6% GST which the players had been absorbed prior to the 3-month zero-rated period. On the other hand, the news of cutting special draw days in 2019 by the Finance Minister also contributed to the selling pressure. However, we believe the cut in special draws which the players handled 22-25 draws a year previously, should have a minimal impact as these draws added with 10% additional tax which crimps profitability. We estimate that for special draw being reduced to 10 from 22-25 currently, the players will see their earnings drop by 2%-3% which is not that impactful. On the other hand, operational-wise, both NFO players registered stable ticket sales for more than a year and we believe the downtrend should have bottomed out. Meanwhile, MAGNUM continued to see stable luck factor in 2Q18 results at its theoretical level of 66% while BJTOTO enjoyed superb luck factor of 60.4%, which was last seen lower than this was two years ago. Having said that, luck factor remains the key earnings determining factor going forth.

A year-end peak quarter ahead, especially for the casino operators. The latest 2QCY18 earnings reporting season was a mixed bag. While MAGNUM’s 2Q18 results came slightly below due to higher taxation, BJTOTO’s 1Q19 net profit surged 147% sequentially on the extreme good luck factor. Meanwhile, while GENM’s 2Q18 results were satisfactory, GENTING’s 2Q18 profit beat estimates due to lower-than-expected MI. Going forth, while NFO may not have year-end peak season for ticket sales, casino operators do enjoy better business volume during year-end festive season. This is good for market sentiment. However, in the upcoming 3QCY18 results, the sector players may see weakening top-lines sequentially with the reintroduction of SST in September after a 3-month tax holiday. Nonetheless, this should be neutral to their earnings as mentioned above as SST is just a replacement of GST in which the players used to absorb the 6% tax previously.

Maintain OVERWEIGHT; still prefer Casino sub-sector. After a good quarter in terms of share price performance in 2QCY18, the Gaming players were back in the gloom mode again in the past three months, especially for the casino operators. However, with inexpensive sector valuations of 13x FY19E PER on average coupled with the casino’s growth story as well as the bottomingout NFO ticket sales downtrend, the sector is worth for a re-look. In addition, NFO players offer attractive yields at above average of 6%-7%. Meanwhile, the settlement of tax penalty with IBR which announced last month should clear the overhand issue for MAGNUM. This should impact yielding by a merely 1% each for FY18 and FY19. However, we are keeping our assumptions unchanged for now, pending upcoming 3Q18 results release in November. In all, we continue to OVERWEIGHTing the Gaming Sector with Casino sub-sector as our preferred pick for its growth story while the NFO players are good for income-seeking investors.

Source: Kenanga Research - 3 Oct 2018