In 2020, we may see excitement from GENM’s home turf operations where the highly anticipated outdoor theme park is scheduled to open in 3QCY20 which is one of the major components of GITP expansion program to enrich non-gaming earnings. In addition, the legalising of casino license in Japan remains the top price catalyst for casino stocks around the world. While these may add to GENTING’s market appeal, recently acquired Empire has to prove its value as a turnaround story which will then set a good earnings direction for GENM and hence GENTING. Meanwhile, for NFO players, values are much in the share prices following the strong rally in 2019 while a tax dispute with IRB will continue to suppress MAGNUM until fully resolved. For now, we keep our NEUTRAL rating on the sector with the NFO players still offering attractive yields of 5-6%.

Casino: Empire to prove its value; focus on Japan new casino license.

Selling pressure on GENM (MP; TP: RM3.30) which started in August following the RPT-acquisition of Empire Resorts Inc. (Empire), has somewhat abated especially after Empire released its earnings forecast with earnings to turn positive at adjusted EBITDA of USD12.5m in FY20 as compared to losses in the past six years and 9MFY19 loss of USD26.3m. As such, 2020 will be the year to see how well the restructuring exercise to turn this American operation works out. On the other hand, GENM’s home turf operations have been faring very well for both gaming and non-gaming businesses. In fact, non-gaming segment has been registering encouraging number reaping fruit from the GITP expansion program. With the outdoor theme park opening this coming 3QFY20, non-gaming business will definitely be propelled further. All these will benefit GENTING (OP; TP: RM7.00) as well. In addition, the Japan IR bidding process will be the main focus for now. Based on Singapore IR bidding experience in 2005-2006 when investors were seen snapping up casino stocks during the bidding period, GENTING and GENS (Not Rated) could be back in the spotlight again.

NFO ticket sales remain upbeat. The NFO players continued to post meaningful improvements in ticket sales as seen in the past few quarterly results, boosted by enforcement clamping down on illegal operators. In fact, the latest 3QCY19 quarterly results showed solid average ticket sales per draw after a seasonally weak post-CNY quarter in 2QCY19. BJTOTO’s (OP; TP: RM2.80) 1QFY20 average ticket sales per draw of RM20.7m was the highest since 3QFY16 (period of Nov 2015 to Jan 2016) beside the CNY-quarter in 3QFY19 (period of Feb-Apr 2019) of RM21.0m while MAGNUM (MP; TP: RM2.80) also saw 3QFY19 average ticket sales per draw jumping 9% YoY to RM16.9jm from RM15.4m but fell 4% QoQ from RM17.7m. As such, it appears that the enforcement’s efforts to curb illegal operators have worked in favour of better ticket sales for licensed operators. On the other hand, MAGNUM was slammed with a total of RM182.8m additional notices of assessment for income tax for 2014 to 2018 for its wholly-owned Multi-Purpose International Ltd (MPIL) which immediately sent its share price tanking. The IRB claimed that MPIL should be taxed under the Income Tax Act 1967 instead of the Labuan Business Activity Tax Act 1990. Earlier in 2017, MAGNUM also had tax dispute of RM476m with IRB and eventually the dispute was settled with RM100m penalty in instalment. In worst case, the new tax dispute will result a loss of RM0.13/share in cash position and affect its dividend payout. Nonetheless, we keep our MAGNUM estimates for now.

A CNY-led peak quarter ahead. The latest 3QCY19 earnings reporting season was satisfactory with all results coming within expectations except GENM’s 3QFY19 which beat forecasts on stronger-than-expected earnings from its domestic casino operation while non-gaming business continued to grow stronger as the GITP started to bear fruit. While strong GENM helped to grow GENTING’s earnings sequentially, GENS saw lower earnings owing to poorer luck factor while the North America operation was hit by higher payroll at RWNYC but earnings for the UK & Egypt unit jumped 90% on lower bad debts. Meanwhile, despite weaker sequential earnings owing to poor luck factor, results for both BJTOTO and MAGNUM were fairly inline. In fact, ticket sales remained strong benefitting from effective enforcement’s effort against illegal operators. Moving forth, the gaming players are heading into the busiest CNY-led quarter with higher business volume expected for casino operators while NFO players are also expected to see stronger ticket sales on seasonality. On the other hand, the total number of special draws was cut further to 8 times per year, from 11, starting from 2020 onwards but will have minimal impact to the NFO players given that these special draws come with 10% additional tax which crimps profitability. While top-line will be reduced by <2%, net profit will be impacted by <1% and the shortfall should be absorbed by potential uptick in ticket sales.

Stay NEUTRAL for the sector, as we see limited upside following the strong rally in NFO stocks while the casino stocks were hammered down due to the RPT-acquisition of Empire. Due to a retracement in NFO stock prices in the past three months, we see value in BJTOTO but sentiment for MAGNUM is likely to be affected by the tax dispute. Meanwhile, we believe that until Empire post positive results, upside for GENM is likely to be capped although non-gaming earnings are expected to improve further. Nonetheless, GENTING is still attractive, trading at 50% discount to its valuation which implies 1.5SD below its 3-year mean while the coming new licence in Japan is a key price catalyst for GENTING.

Source: Kenanga Research - 3 Jan 2020