Although gaming stocks especially casino operators’ share prices have rebounded solidly (by 18-24% YTD), we expect more upsides. To be sure, near-term earnings remains dicey as the upcoming 1QCY21 results are expected to be hit by the 1-month closure during the MCO 2.0. However, based on past experience, business volumes should rebound swiftly on pent-up demand post the lifting of MCO. For GENM, its outdoor theme park, slated to open in mid-2021, would drive its non-gaming revenue while reopening of borders should boost revenue for GENS; both will benefit GENTING eventually. Meanwhile, NFO ticket sales are reverting to 80-85% of pre-COVID-19 level post MCO 2.0. Further enforcement of clamping down the illegal operators should also boost 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, the NFO players offer above average yield of >5%.

Casinos: awaiting borders to re-open to boost earnings. 4QFY20 results for GENTING (OP; TP: RM5.97) and GENM (OP; TP: RM3.35) showed commendable recovery. GENS’s Resort World Sentosa reported results at oar with 3QFY20 level which is fairly commendable while GENM’s Resort World Genting was impacted by CMCO which restricted interstate travel with Resort World New York City turning around after business resumption in early Sep 2020. Having said that, the upcoming results are expected to be weaker despite the traditionally strong CNY-quarter in 1QFY21 as Malaysian operations were shut down for about a month due to MCO 2.0. However, business volume should recover strongly from 2QFY21 and in 2HFY21 as the vaccination progress should be in a more advanced stage by then. Moreover, the long-awaited outdoor theme park, scheduled to open in mid-2021, should be a key attraction and earnings driver for its noncasino segment. Going forth, with vaccines at the roll-out stage and borders expected to re-open soon, the casino operators are expected to benefit especially GENS which is highly reliant on overseas patrons.

NFO ticket sales to normalise in 2HCY21. In the latest 4QCY20 results which saw NFO players registering steady recovery with ticket sales returning to about 80-85% of pre-COVID-19 level. However, like its casino sub-sector peers, NFO players are expecting a weaker 1QCY21 results given the 1-month hit arising from the MCO 2.0 as NFO outlets in all states except Sarawak were shut down, We learnt that ticket sales during this period were around 15% of pre-MCO 1.0 level. However, ticket sales have since rebounded strongly to 85% of pre-COVID-19 level which was the same level just before the closure during MCO 2.0. This shows that ticket sales are fairly resilient as we believe punters are getting used to SOP restrictions while patronising the outlets. As such, we expect ticket sales to revert back to pre-COVID-19 level in 2HCY21. Going forth, enforcement on illegal operators remain the key to ticket sales growth while we believe any replacement draws for their 40 cancelled draws during the MCO 1.0 period would provide some earnings kicker. So far, there is no update on the replacement draws but the government has approved the increase of special draws back to 22 in 2021 from eight in 2020. Still, 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.

1QCY21 is not a usual strong CNY-quarter but will pick up swiftly thereafter. After a steady recovery in 2HCY20 following a washed-out MCO 1.0 quarter in 2QCY20, the 1-month MCO 2.0 lockdown is expected to impact the upcoming 1QCY21 results badly again. However, we believe a swift recovery boosted by pent-up demand post MCO 2.0 is highly likely as was the case post MCO 1.0. Overall, recovery for the NFO players should be quicker as opposed to the casino operators as the formers’ operations are less affected by interstate/overseas travel restrictions given that their outlets are available in towns/cities throughout the country. As such, we expect NFO ticket sales to normalise to pre-COVID-19 levels in 2HCY21 on the back of continuous enforcement clamping down on the illegal bookies while casino volume is likely to be normalised earliest in 2022 as borders eventually reopen depending on vaccine roll-out progress. Meanwhile, the opening of its outdoor theme park in mid- 2021 will be a major driver for non-gaming revenue for GENM.

A recovery play; Still OVERWEIGHT. While near-term earnings remain dicey especially for the casino operators, the gaming players should benefit from the earning recovery play. Share prices of casino stocks have risen solidly by 18% and 24% YTD, respectively, for GENM and GENNTING and we still see upside for these stocks as the re-opening of borders should boost revenue further. Meanwhile, after a brief dip during the MCO 2.0, the NFO players’ ticket sales are back to 80-85% of pre-MCO levels which are very encouraging which will support BJTOTO and MAGNUM’s dividend payouts which yields >5%. In all, we keep our OVERWEIGHT rating for the sector with GENTING maintained as our TOP PICK.

Source: Kenanga Research - 2 Apr 2021