Although the sector has not been performing in the past five years, what happened in the past two months, especially for the casino operators, was something that we have never seen before. GENM plunged to a new eight years’ low after being hit by triple whammies namely the 10% hike in tax, the unexpected cancellation of Fox Theme Park and the huge RM1.8b impairment for US Tribe’s promissory notes. This also thumped GENTING as it is now trading at half its SoP values. These issues will continue to suppress GENM as well as GENTING, but one cannot deny the attractive valuations of GENTING as the non-GENM assets are doing well. On another hand, for the NFO players, with the bottoming out of ticket sales downtrend with stable numbers in the past one year, we believe their above-average dividend yield of 6%-7% is sustainable making them a good investment avenue for income-seeking investors. In all, despite the sentiment uncertainty for the casino operator, we remain OVERWEIGHT on the Gaming Sector for its attractive valuation.

Value emerging after heavy sell-down; Keep OVERWEIGHT. It has been a tough quarter for the gaming players in the past three months. This was especially so for casino stocks GENM (MP; TP: RM3.10) being hit by triple whammies within the month of November that resulted in its share price plunging to new low since 2010 at RM2.79 in mid-December before recovering to the current RM3.00-level. Like-wise, parent company, GENTING (OP; TP: RM7.55) also took a dive as share price declined 21% in the past three months. We opine that while the current issue with GENM will continue to suppress GENTING’s share price, one cannot deny the attractive valuation of the stock which is now trading at 50% discount to its SoP valuation. On the other hand, NFO ticket sales’ downtrend had abated. As such, their above-average dividend yield of 6%-7% is sustainable, which is good for income-seeking investors.

Casino: triple setbacks within the month of November, led to share of GENM plunging to a new low since October 2010. The stock hit limit-down in early November after the government revealed in Budget 2019 that casino duties will be increased by 10% effective Jan 2019. Then GENM fell further as much as by 19% on 28th November after it filed an USD1b lawsuit against Twenty-First Century Fox and The Walt Disney Corporations for the unexpected termination of Twentieth Fox Theme Park. With the dust yet to settle, it was hit again with the huge RM1.83b impairment for the US Tribe’s promissory notes when it released its 3Q18 results on 30th November. By mid-December, it had lost 34% of its value since early November, the steepest decline so far in such a short period. We believe investors need time to regain confidence in the stock. On the other hand, GENTING also faced the same fate as investors sold down the parent company which we believe is excessive given the overall improved performance for non-GENM assets, especially GENS (Not Rated) which showed encouraging recovery in the past two years that looks sustainable. In addition, the soon to be started Japan’s IR bidding process will be the main attention in 2019. And, based on Singapore IR’s bidding experience in 2005-2006, investors snapped up casino stocks during the bidding period. This may augur well for GENTING and GENS. In all, the GENM should perform better operationally but casino duties hike could be a wildcard.

NFO: stabilised ticket sales lead to sustainable yield incomes. After a long five years of ticket sales downtrend, the NFO players finally saw the decline subsiding and stabilised in the past one year. This led us to believe that the downtrend should have bottomed out. In fact, luck factors were on the operators’ side in the recent quarters. In the latest results releases, MAGNUM (OP; TP: RM2.25) reported solid core earnings in 3Q18 which doubled from the previous quarter owing to good luck factor and tax holiday effect. On the other hand, the 31% fall in 2Q19 earnings for BJTOTO (OP; TP: RM2.55) is not unexpected given the normalisation of luck factor after an exceptional run in the preceding quarter. YTD, prize payout ratio of 65.25% for MAGNUM in 9M18 and 61.65% for BJTOTO in 6M19 were 1%-2% lower than their past 2-year averages. Having said that, luck factor remains the key earnings determining factor going forth. Unlike the casino players which faced casino duties hike, the NFO players did not see any tax hikes in Budget 2019 except the expected special draws cut. We believe the NFO players were not imposed higher gaming tax this round due to the complexity of the industry dynamic as it is not as straightforward as the casino sub-sector. The NFO industry has been suppressed by the illegal operators for years. Any change in higher taxes may results in reducing prize payout and lead to illegal players gaining more market share from the legal operators. At the end, the government will lose out with lower tax revenue receipts.

2019 a challenging year. We expect challenges in 2019 given the casino duties hike as well as the 50% reduction in special draws for NFO players. Earlier, we had trimmed GENTING and GENM’s FY19 earnings estimates by 5% and 13%, respectively, to account for the 10% hike in casino duties. While keeping BJTOTO and MAGNUM’s estimates unchanged, the impact from the special draws cut is minimal at only 2-3% given that these special draws come with 10% additional tax which crimps profitability. While ticket sales are expected to be stabilised going forwards, GENM should see improving visitor traffic with the GITP expansion program coming to maturing stage, although the opening of the outdoor theme park remains uncertain. Nonetheless, 1QCY19 is traditionally a peak quarter, especially for business volume owing to the Chinese New Year effect. For the upcoming 4QCY18 earnings results, it is also a high business volume quarter, especially for casino operators on the year-end festive season.

Source: Kenanga Research - 3 Jan 2019