There was a friendly turn of fortune for the sector which scored as the top market performer in 1Q19 despite a relatively lacklustre overall market sentiment. This was partly attributable to bottom-fishing for heavily bashed down casino stocks while NFO players were snapped up as ticket sales improved on the back of enforcement’s clampdown on illegal operators. Even then, these stocks still trade at attractive valuations of 10x-12x prospective PERs which we believe still offer upsides. We are cautious on casino players while awaiting GENM’s 1Q19 results to assess the exact impact from the 10% casino duty hike, but sentiment on GENTING should improve given the meaningful recovery of GENS as well as the legalising of casinos in Japan. Meanwhile, the continued clampdown on illegal operators should help improve NFOs’ ticket sales; thus 6%-7% yield is sustainable making them a good investment avenue for income-seeking investors. In all, we remain OVERWEIGHT on the Gaming Sector with BJTOTO our TOP PICK for its attractive valuations.

Casino: 1Q19 results the key focus. Both GENTING (OP; TP: RM7.95) and GENM (MP; TP: RM3.60) saw their shares rebounded in the past three months by 9% and 6%, respectively, following a slew of bad news in 4Q18 for GENM. Although valuation remains attractive, we are not outright bullish on the casino operators as we believe the upcoming 1Q19 quarterly results season is crucial, especially for GENM. This is because the upcoming results will see the actual impact from the 10% casino duty hike, which took effect in January and we expect a 13% cut in earnings. That aside, overall casino operations across all geographical countries posted encouraging business volume. This was especially so for GENS (Not Rated) as the recovery in the past two years 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 were seen snapping up casino stocks during the bidding period. This may augur well for GENTING and GENS.

NFO: seeing daylight in ticket sales growth; yields still attractive. After five long gloomy years, we finally see a meaningful improvement in ticket sales largely attributable to the enforcement’s clampdown on illegal operators. This led to 3% and 13% QoQ improvement in average ticket sales per draw in the latest quarterly results for BJTOTO (OP; TP: RM2.65) and MAGNUM (OP; TP: RM2.50), respectively. The enforcement is especially good news for the NFO players as the industry has been suppressed by the illegal operators for years. The continuous clamping down of illegal operators in the future will help to boost ticket sales for licensed NFO players. In view of this which led to commendable ticket sales in the past two quarters, both stock prices have risen impressively by 15% and 22% YTD, respectively. However, on the flipside, the reduction in special draws by half in 2019 from 20- 22 draws previously will dampen overall ticket sales growth in the near term, but it has a minimal impact to the bottom-line as these special draws come with 10% additional tax that cap profitability of which we expect a mere 2-3% reduction in earnings. Nonetheless, luck factor which was fairly stable in the past two quarters, remains the key determining factor to the players’ earnings.

1Q19 results season a seasonally strong quarter operationally. In the latest 4QCY18 results, it was a good set of results for the sector with two players coming above, and two within expectations. GENM’s 4Q18 beat expectation owing to lower taxation but operationally, results were fairly with expectations. Meanwhile, MAGNUM’s also reported FY18 beating expectations given stronger-than-expected ticket sales and luck factor. In fact, ticket sales per draw improved on the back of authority clamping down on illegal operators. Likewise, BJTOTO also experienced the same conditions in its latest 3Q19 results, which matched expectation, where average ticket sales per draw rose 3% QoQ. The in-line results from GENTING were helped by strong earnings from GENM and GENS but were weighed down by disappointing GENP’s results, which plunged 57% as CPO and PK prices tumbled. Going forth, the upcoming 1QCY19 result is expected to be a seasonally strong quarter given the CNY effect which helps business volume. However, casino stocks are expected to be impacted by the additional 10% casino duties hike while less special draw days will lead to lower overall ticket sales.

Value and yield in store; Keep OVERWEIGHT. Although the sector performed fairly well in the past three months in terms of share price movement, we believe there are still upsides given the heavy sell-down in the past few quarters. GENTING is still trading at nearly half its SoP-valuation or 9x FY19 PER, largely attributed to the negative news from GENM. However, one cannot deny the attractive valuation of the stock. While the sustainable recovery of GENS should help GENTING, positive sentiment may arise from the legalising of casino in Japan as well. Meanwhile, GENM’s valuations also look attractive at 12x FY19 PER, but we prefer to wait for the upcoming 1Q19 results to assess the actual impact from the 10% casino duty hike. On the other hand, NFO ticket sales’ downtrend had abated. With the continuation of enforcement clamping down on illegal operators, ticket sales should improve further. As such, their above-average dividend yield of 6%-7% is sustainable, which is attractive for income-seeking investors. BJTOTO is now our Top Pick given its attractive valuations of 12x FY19 PER and 7% net yield.

Source: Kenanga Research - 3 Apr 2019