The re-opening of GENM’s hill-top casino and NFO outlets this week will elevate the depressed sentiment in the past three months into a big smile as the sell-down should come to an end. Still, a “business as usual” to pre-COVID-19 level is unlikely any time soon as near-term earnings are likely to be lacklustre, especially for casino players which would see a loss-making quarter in 2QFY20. But, business volume should slowly pick up in 2HCY20 and one should look into next year’s earnings instead of this year. For instance, we forecasted a quarter drop in GENM’s FY21 earnings against FY19, but we still see >20% upside for the stock as we believe that the virus-driven sell-down is overdone sector-wide. As such, we are still OVERWEIGHTing the sector with GENTING as our preferred sector pick for its deep valuation. Upgrade GENM and BJTOTO to OP from MP and MAGNUM to MP from UP.

NFOs re-opened on 17 Jun. Yesterday, all three NFO operators in Peninsular Malaysia, namely SportsToto, Magnum4D and Damacai, have re-started operations after a 3-month closure since the start of Movement Control Order (MCO) on 18 Mar. With this, both BJTOTO (OP; TP: RM2.55) and MAGNUM (MP; TP: RM2.45) will see their NFO units conducting six draws each in 4QFY20 and 2QFY20 as compared to the usual quarterly 40-42 draws. We have earlier assumed nine draws available in the said quarter as the MCO was extended till 9 Jun. For the entire 3 months of business closure, BJTOTO had to cancel a total of 40 draws while MAGNUM also had 39 draws cancelled. On the other hand, we may see higher special draws from eight per year currently given the purpose of special draws for emergency events and COVID-19 is a good reason to have extra special draws to raise tax revenues for the government, However, special draw has minimal earnings enhancement to the NFO operators as it comes with additional 10% tax.

Home turf casino to re-open this Friday. After announcing that two of its local resorts, namely Resorts World Langkawi and Resorts World Kijal will re-open today, Resorts World Genting announced that it is resuming business tomorrow which is highly positive for GENM (OP; TP: RM3.35) and GENTING (OP; TP: RM6.00). Due to limited capacity, entry into casino floors will be for Genting Rewards members only for the time being. Outside Malaysia, based on online checking, Genting UK should reopen on 4 Jul, but Resorts World Casino New York and Resorts World Catskill are still closed while Resorts World Birmingham has been re-opened for shopping since 15 Jun and Resorts World Bimini is taking booking for re-opening on 1 Jul. A near total closure throughout 2QFY20 indicates that the upcoming results for GENM is expected to be loss-making while together with Resorts World Sentosa which is also closed, this would be equally bad for GENTING as well. During results conference call, management disclosed that the burn rate in Apr for Resorts World Genting was RM4m/day, GBP7m/month for UK and USD7m/month for North American operations. As such, operating loss is estimated to be c.RM200m for Apr alone. On the other hand, it was reported that GENM is cutting 15% or 3,000 of its workforce, implying that the severity of the impact from the virus led lockdown.

Expecting the worst in 2QCY20. With only six draws available for both BJTOTO and MAGNUM, their upcoming 4QFY20 and 2QFY20 earnings are expected to be badly hit to as low as below RM5m while GENM and GENTING are likely to see their 2QFY20 in the red as its home turf casino will only operate for 12 days in the quarter. Post re-opening, we believe the slowdown attributable to social distancing likely to have less impact on the NFO players but a greater impact on the casino operators given the operating space factor while the latter is also bounded by travelling restriction. Overall, we expect earnings to slowly pick up in 2HCY20 before a return to “business as usual” level in 2021. Earnings estimate-wise, we trimmed BJTOTO’s FY20 earnings forecast by 2.5% as we lowered our draw assumption by 3 draws to 126 while MAGNUM’s FY20 earnings are also lowered slightly by 2.3% as draw assumption is cut by 3 draws to 127. Both adjustments are only on draw assumption with other assumptions unchanged. However, there is no change in FY21 estimates for both NFOs for now. On the other hand, we made no changes to our GENM and GENTING estimates as we had already assumed a slowdown till end of the year.

Sentiment to improve; Keep OVERWEIGHT. The resumption of business is definitely a strong share price catalyst for the sector players as this will help to reduce volatility. As such, GENTING remains as OP while we upgrade GENM and BJTOTO to OP from MP. We also raise MAGNUM to MP from UP previously. Valuation-wise, we also have switched back to SoP/DCF derived valuations to value the stocks from PBV method previously. With this, we upgrade target prices for: (i) GENTING to RM6.00 based on 42% discount (5-year mean) to its SoP, from RM4.90 at -2SD 5-year mean of 0.52x; (ii) GENM to RM3.35 based on 10% discount to its SoP, from RM2.50 which was based on -2SD 5-year mean of 0.79x; (iii) BJTOTO to RM2.55/DCF share from RM2.25 which was based on -1SD 5-year mean of 4.27x; and (iv) MAGNUM to RM2.45/DCF share from RM1.95 which was based on -1SD 5-year mean of 1.12x. We also keep our sector OVERWEIGHT rating with GENTING staying as our preferred sector for its deep valuation, trading at 57% discount to its SoP valuation while our target price of RM6.00 is just slightly 2 sen higher than its combined equity stake values in GENS and GENM based on current share prices, not forgetting its equity stakes in GENP and other non-core businesses.

Source: Kenanga Research - 18 Jun 2020