Gaming stocks saw their share price seesawing in the past one year as the country entered into several movement control restriction of varying degrees to combat the COVID-19 virus. We reckon that 2021 is forming to be another tough year for the players with the on-going FMCO but we believe the impact would be less severe than 2020 given their cost rationalisation exercises. With the start of Phase 3 of National COVID-19 Immunisation Program last week and targeted full nation-wide herd immunity by year-end, business volumes should rebound swiftly on pent-up demand post pandemic coupled with the re-opening of borders. As such, we still rate the sector OVERWEIGHT with GENTING as our TOP PICK for its deep value boosted by its new casino. On the other hand, NFOs remain as good revenue for income seekers for their attractive yield.

A recovery play as vaccination speeds up; OVERWEIGHT. In the past one year, the gaming players saw their share prices seesawing as the country entered several movement control restrictions to combat the COVID-19 virus. We reckon that 2021 will be a tough year after the tumultuous 2020 as we have moved from MCO 2.0 closure in Jan/Feb followed by CMCO to the stricter MCO 3.0 in May, and finally to full lockdown nationwide (FMCO) currently. As such, the industry players are expected to register another weak results for this year but we believe the impact is anticipated to be less severe than that of 2020 given companies are more cost efficient having gone through cost rationalisation exercises last year. More importantly, we are now already at the vaccination stage which is a big step-up from last year. The Phase 3 of National Covid-19 Immunisation Program in Klang Valley started last Monday and the nation is expected to achieve held immunity by the year-end. This augurs well for business recovery with gaming operators being key pent-up demand beneficiaries; hence, well positioned as earnings recovery plays. As such, we continue to rate the sector an OVERWEIGHT with GENTING (OP: TP: RM6.05) maintained as our TOP PICK.

GENTING is still our TOP PCK. While both companies are expected to benefit from the recovery play as vaccination move to the advanced stage, we prefer GENTING over GENM (OP; TP: RM3.50) for its deep valuation and a better news flow. There are at least two major factors for GENTING such as: (i) the GENS (Not Rated)-led consortium qualifying for Yokohama’s integrated resort (IR)’s Request for Proposal (RFP) process on 31 May, with the RFP win’s announcement this summer before the formal bidding process at national level officially begins in Oct, as well as (ii) the newly launched USD4.3b Resort Word Las Vegas (RWLV) on 24 June. Based on past Singapore IR bidding process, GENTING’s share prices reacted positively before and after the process. In addition, GENTING’s earnings are rather stable as opposed to GENM in the past one year given its geographically diversified earnings while GENM was hit by more MCO-led closures whereas Singapore had a better handle on the COVID-19 situation. On the positive note, GENM’s US operations have shown solid numbers since the reopening last Sep and this should augur well for the newly launched GENTING’s owned RWLV.

NFOs still offer attractive dividend yield. 1HCY21 will be another bad patch for the NFO operators BJTOTO (OP; TP: RM2.43) and MAGNUM (MP; TP: RM2.10) given the two MCOs and now the on-going FMCO. The operators were allowed draws during the 1-month MCO 2.0 with NFO outlets shut in all states except Sarawak which led to ticket sales falling to around 15% of pre-COVID-19 period. Ticket sales recovered to 80-85% of pre-COVID-19 levels in MCO 3.0 which started from 12 May as NFO outlets were allowed to operate with SOP restrictions. However, the outlets were closed completely since the start of FMCO on 01 Jun. Overall; we believe 1HCY21 would be better than 1HCY20 as the former had only 14-15 draws cancelled while the MCO 1.0 last year had a total of 40 draws cancellation. As FMCO is still on-going, this will continue to weigh on earnings until it is lifted. As such, 2021 will still be a tough year. Having said that, even with earnings cut (see below), the NFO operators still offer attractive dividend yields of 3%-5% for this financial year.

2021 another tough year; a better year in 2022. We assume a 3-month lockdown closure for the local gaming industry which lasts till end-Aug before a less stringent movement control restriction that allow the players to re-open from Sep. With this, we expect GENM’s FY21 net loss to widen to RM545.5m from RM175.9m and trimmed FY22 estimates slightly by 0.6% as we keep our key assumption unchanged. This led us to cut GENTING’s FY21/FY22 earnings by 27.1%/0.1%. However, there are no changes to our NDPS forecast for both companies. Nonetheless, border re-opening is expected to re-rate valuations; we value Resort World Genting at +0.5SD to 3-year mean at 12.4x from mean of 10.4x and GENTING’s discount to SoP at +1.0SD to 5- year mean at 41% from mean of 43%, GENM’s TP is upgraded to RM3.50 from RM3.00 while GENTING’s TP to RM6.05 from RM5.58. Meanwhile, assuming cancellation of 45 draws from the 3-month lockdown while no changes to ticket sales per draw assumption and prize payout ratios, we cut BJTOTO’s FY21E/FY22E earnings and NDPS by 14%/26% and MAGNUM’s by 26%/0%. Post-earnings revision, BJTOTO’s DCF-driven TP is reduced slightly to RM2.43 from RM2.45 as we rolled over valuation to FY22 while MAGNUM’s DCF-derived TP is increased to RM2.10 from RM2.05 after updating its investment securities. (Please refer to overleaf for a detailed table)

Source: Kenanga Research - 30 Jun 2021