Kenanga Research & Investment

Gaming - Recovery Play

Publish date: Thu, 30 Sep 2021, 09:25 AM

The Gaming Sector is the key victim of the COVID-19 pandemic in the past 1.5 years as their share prices seesawed over the period as the country entered into several movement control restrictions of varying degrees to combat the deadly virus. However, prospects are expected to make a turn for the better with COVID-19 entering an endemic as high vaccination rate keeps severe and death cases low. As such, a reopening from FMCO locally as well as border reopening is imminent. Hence, we expect a swift rebound of business volumes from the reopening which had witnessed in the post-MCO 1.0 lift. Thus, we reckon that 2022 would be a better year after the tough 2020-2021. In all, we still rate the sector OVERWEIGHT with GENTING as our TOP PICK for its deep value coupled with being the beneficiary from the recovery plays of GENM and GENS as well as the new RWLV casino. On the other hand, NFOs remain as good revenue for income seekers for their attractive yield.

Casino reopening is imminent. After the success of Langkawi travel bubble pilot project, the Tourism Minister said Genting Highland, Melaka and Tioman Island are next on the travel bubble list to reopen. This is definitely positive news for GENM (OP; TP: RM3.47) as its Resort Word Genting (RWG) has been closed temporarily since 25 May with the current cash burn rate of RM2.5m/day without interest expenses. In addition, GENM’s UK and USA units also reported significant improvements in 2QFY21 after the UK land-based casino which reopened in mid-May while Resort World New York City (RWNYC) had the relaxation of operating restriction from early Apr. As such, the reopening of RWG should turn GENM profitable again. Meanwhile, we are disappointed that GENS’ (Not Rated) bid to own a new casino in Japan is halted after the city of Yokohama had on 10 Sep officially withdrawn bid to host casino resort in the city, the impending border reopening will boost GENS earnings. In all, GENTING (OP; TP: RM6.47) is our TOP PICK for its deep valuation coupled with the reopening of GENM, GENS and the new wholly-owned Resort World Las Vegas (RWLV).

NFOs still offer attractive dividend yield. We believe the worst is over for NFOs as BJTOTO (OP; TP: RM2.42) and MAGNUM (MP; TP: RM2.04) were allowed to reopen their outlets starting 14 Sep after having been closed since 01 Jun, with the start of FMCO, but it was two weeks earlier than our expectations as we had previously assumed to only open in Oct. To recap, 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. With the resumption of business, ticket sales should recover swiftly which was witnessed in the past two reopening post MCO1.0 and MCO 2.0 lockdowns. On the other hand, with the two lockdowns amounting to 4.5 months closures, the NFO operators resume to offer attractive dividend yields of >6%.

Look past 2021; a better year ahead in 2022. While gaming companies are expected to be in the red in the upcoming 3QCY21 results due to the FMCO lockdown, the reopening of NFOs on 14 Sep and RWG likely on 01 Oct is just in time for the seasonally strong year-end quarter, especially for the casino players. We believe a swift recovery boosted by pent-up demand post FMCO is highly likely as was the case post MCO 1.0. As such, we expect NFO ticket sales to recover quickly to 80%-85% of re-COVID- 19 levels before a full normalisation in 1HCY22 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. Meanwhile, the opening of its outdoor theme park Genting SkyWorlds, which is ready to open its door, will be a major driver for non-gaming revenue for GENM. In all, although NFOs reopened two weeks earlier than our expectations, we keep our BJTOTO and MAGNUM estimates unchanged while the impending reopening of RWG is well within our expectations albeit earnings prospects remain dicey. With vaccination is at advanced stage while border reopen is likely soon, 2022 is expected to see a meaningful recovery.

A recovery play; OVERWEIGHT maintained. After several lockdowns in the past 18 months, we are finally seeing imminent economic reopening as vaccination is heading to advanced stage while the vaccines have showed its high efficacy in preventing transmission risk and hospitalisation. The success of Langkawi travel bubble would add more tourism places into the bubble list while an interstate travel should come soon with cross border being next. This is definitely augured well for business recovery with gaming key pent-up demand beneficiaries which well positioned as earnings recovery plays. As such, GENTING maintained as our TOP PICK as to benefit from the recovery plays on GENM and GENS and the new RWLV. For income seekers, NFOs are still the best yielding stocks for a sustainable attractively yield of >6%. Maintain OVERWEIGHT on the Gaming Sector.

Source: Kenanga Research - 30 Sept 2021

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