A laggard sector poised to benefit from easing of travelling restrictions as vaccines are expected to be rolled out soon. With earnings set to recover from the washed-out quarter in 2QCY20, sector valuation remains attractive as stocks are still 15-26% cheaper than a year ago. Overall, casino players, which were badly hit, are expected to lead a swift earnings rebound as opposed to NFO players for which ticket sales are currently at 80-85% of pre-MCO levels. Still, we expect GENM to see strong local casino revenue with the opening of its outdoor theme park attracting tourists while GENTING should benefit from the strong GENS numbers which is fairly sustainable. Meanwhile, although the authority had already approved the increase in special draws back to 22 draws in 2021 from only eight last year for the NFOs, it may not be earnings enhancing. Continuous enforcement clamping down on illegal players remains the key to drive ticket sales. In all, we continue to rate the sector OVERWEIGHT with GENTING as our TOP PICK for its deep value while for income seekers, both NFO players offer above average yield of >5%

A recovery play; Still OVERWEIGHT. We believe the gaming players, especially the casino operators will benefit from eventual borders reopening as well as vaccine rollout in 2021, as earnings will recover swiftly. Both GENTING (OP; TP: RM5.70) and GENM (MP; TP: RM2.60) have seen their casinos across all geographical locations experiencing pent-up demand from the reopening in 3QFY20 after the washed-out MCO-affected quarter in 2QFY20. As such, re-opening of borders should boost demand further. Meanwhile, the NFO players saw their ticket sales at 80-85% of pre-MCO levels which are very encouraging. This will continue to support BJTOTO (OP; TP: RM2.45) and MAGNUM (MP; TP: RM2.10)’s dividend payouts which yield >5%. In all, we keep our OVERWEIGHT rating for the sector while with GENS (Not Rated) taking the driver seat of earnings recovery, we prefer GENTING over GENM.

Casinos: awaiting borders to re-open to boost earnings. 3QFY20 results for GENTING and GENM came as positive surprises where both key casino GENS’ Resort World Sentosa and GENM’s Resort World Genting registered impressive profitable earnings attributed to pent-up volume despite operating at lower capacity. The strong business volumes were also experienced in GENM’s UK and North America casinos with reduced losses at EBITDA level in 3QFY20. Going forward, with vaccines at the roll-out stage and with borders expected to re-open soon, the casino operators are expected to benefit especially GENS which is highly reliant on overseas patrons, which will benefit parent GENTING. While Resort World Genting would continue to see strong earnings once the CMCO is lifted, GENM is less favourable than GENTING given its non-Malaysian casinos are underperforming, not to mention its loss-making associate Empire Resort. However, the long-awaited outdoor theme park which was scheduled to open in mid-2021 should be the key attraction and earnings driver for non-casino segment.

NFO ticket sales to normalise in 2021. NFO share prices have been fairly stable post the market melt-down in mid-March 2020 as their business volume recovery was faster than the casino operator given that 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 80-85% of pre-MCO levels currently. This is despite the on-going CMCO as we believe punters are getting used to SOP restriction while placing bets at the outlets. We expect ticket sales to revert back to pre-MCO level in 1HCY21. Going forth, enforcement on illegal operators remain the key to ticket sales growth while we believe any replacement draws for their 40 cancelled draws in MCO period, during this pandemic period maybe not be material enough as the new draws would likely cannibalise ticket sales of normal draws. So far, there is no update on the replacement draws but the government had approved the increase of special draws back to 22 in 2021 from eight in 2020. But, these special draws have limited earnings impact as they come with additional tax which crimps profit margin. Nonetheless, NFOs pay attractive dividends which are supported by their resilient earnings.

A better 2021. A recovery from the preceding washed-out MCO quarter, 3QCY20 results for the sector was a mixed bag with swift recovery boosted by pent-up demand. However, the upcoming 4QCY20 results are expected to be weak especially for GENM given that CMCO was reinstated throughout the country except in three states in early Nov, restricting interstate travelling that affect tourists flow to Genting Highlands. In addition, the re-imposition of lockdown in the UK and resurgence of new cases in North America will pressure GENM’s earnings further. However, earnings downside risk for GENTING will be mitigated by GENS which is expected to lead earnings recovery within the group. In all, 2020 is a lost year. However, the recovery, led by casinos re-opening, was strong in 3QFY20 and this should extend into 2021 as borders eventually reopen depending on the vaccine roll-out progress. We believe NFO ticket sales should revert back to pre-MCO levels in 1HCY21 but casino operators would take longer time to normalise, possibly only in 2022.

Source: Kenanga Research - 5 Jan 2021