We believe the worst is over for the sector after the washed-out 2QCY20 due to lockdowns as business operations have already resumed, albeit earnings recovery is likely to remain patchy for casino operators while NFO players have seen their ticket sales at 85% pre-MCO level. Meanwhile, GENM is our TOP PICK for this space as we believe it is the direct beneficiary of earnings recovery on the back of local tourism as overseas travel is not possible at this juncture and the last time we saw its share price this low was in Feb 2009. However, albeit attractive valuation, GENTING’s earnings are likely to be affected by lacklustre prospect of GENS in the near term. Overall, business volume for both casino and NFO should slowly pick up in 2HCY20 and investors should look further to next year’s earnings recovery instead of this wash-out year. As such, we remain OVERWEIGHT on the gaming sector. For income seekers, both NFO players offers above average yield of >7%.

Casinos: earnings should pick up post-reopening from the badly hit 2QCY20. We now prefer GENM (OP; TP: RM2.75) over GENTING (OP; TP: RM5.10) as it is an recovery play for domestic-centric earnings whereas the latter has exposure to GENS (Not Rated) which is highly reliant on overseas patrons. Thus, GENM has the better edge on earnings recovery as there is currently no possibility of international travelling, but local attractions including Genting Highlands are visited by local tourists and day trippers. Meanwhile, all Genting group’s casinos have reopened from COVID-19-led lockdown except for GENM’s Resorts World Bimini in the Bahamas which had temporarily suspended operations again from 25 Jul after re-opening for merely three weeks earlier on 01 Jul due to a spike of new cases there. Going forth, we are of the view that any earnings recovery would not be material in the immediate term, as the gaming floor operations are restricted by SOP rule, but a meaningful recovery is likely to be seen next year as more vaccines are likely to be ready by then.

NFOs: ticket sales are at 85% of pre-MCO level. Compared to the casino operators, the business volume recovery for NFO players is faster as their outlets are well spread throughout the country whereas there is only one casino in Genting Highlands. So far, the ticket sales trend is fairly encouraging, recovering to 85% of pre-MCO level currently, as opposed to 80% about a month ago. However, BJTOTO (OP; TP: RM2.40) is at its 52-week low and also lower than during the market meltdown in midMar which we believe is unwarranted given the ticket sales recovery. We believe the recent sell-down on BJTOTO could be due to the recent lockdown in four districts in the east coast of Sabah given the spike in COVID-19 cases. But we believe the reaction is overdone as there are only five outlets in these four districts as against its total 680 outlets nationwide; thus, the impact is rather insignificant. On the other hand, MAGNUM (MP; TP: RM2.20) is spared from selling pressure as it has no outlet in Sabah. Going forth, the operators may get replacement draws next year for the 39-40 draws cancelled during the lockdown in 1HCY20. Nonetheless, continuous enforcement effort to clamp down illegal operators is still key to immediate ticket sales growth which was proven a year ago before the MCO kicked in. On the other hand, it is Budget time and with the attendant speculation of gaming tax hike as the last gaming tax hike was 10 years ago in Jul 2010. But, in our opinion, any change in higher taxes may result in reduced prize pay-out and likely lead to illegal operators taking more market shares from the legal players. On balance, the government will lose out with lower tax revenue receipts. As for GENTNG, its tax was hiked just 2 years ago and before that in 2005 and given the lower patronage and losses, we believe it is unlikely that casino gaming tax will be hiked this year.

Look pass the disastrous 2QCY20 results season. It was a washed-out quarter in the latest 2QCY20 results which was highly expected on MCO-led business closure but results came weaker than expected with all players reporting huge losses. GENTING turned in core loss of RM516.5m in 2QFY20 as GENM’s core loss widened to RM793.2m as virtually all its casino operations were under complete lockdown during the quarter while GENS also reported its worst ever results in 2QFY20 with core loss of SGD116.5m. Meanwhile, BJTOTO and MAGNUM reported net losses of RM43.3m in 4QFY20 and RM23.7m in 2QFY20, respectively, as both NFO players cancelled a total of 34 draws each due to the MCO-lockdown with ticket sales shrinking by 91% and 92% sequentially, respectively. Going forth, we believe the worst is over after 2QCY20 and expect a better 2HCY20 for all players as businesses have reopened with volume slowly picking up, although it may not fully recover to preMCO level, especially for casino operators due to social distancing rule that is limiting operating space as well as cross border travelling restriction.

Buy for recovery in 2021; maintain OVERWEIGHT. We are of the opinion that the worst is over for the sector post the disastrous 2QCY20 quarterly results season which captured almost the entire lockdown period. With the reopening of NFO outlets on 17 June and casino on 19 June, the going is now expected to get better from the worst ever quarter in 2QCY20 with all players registering losses. While earnings prospect for casino operators is likely to remain challenging in the near term given higher overheads and cross border restrictions, NFO ticket sales are currently at 85% of pre-MCO level which is fairly encouraging. In all, we keep our OVERWEIGHT rating on the sector with GENM as our TOP PICK for 4QCY20 Strategy being an earnings recovery play while for income seekers, both the NFO players offer above average yield of >7%.

Source: Kenanga Research - 5 Oct 2020