Kenanga Research & Investment

Gaming - Recovery Play

Publish date: Tue, 28 Dec 2021, 09:46 AM

After two years of dismal earnings results and price performance being a key victim of the COVID-19 pandemic, prospects of the Gaming Sector are expected to make a turn for the better with COVID-19 entering an endemic phase as higher vaccination rates keeps severe and death cases low. Resort World Genting and the NFO are already allowed to reopen last Sept which should turn the industry players profitable again in 4QCY21 after the MCO 3.0 lockdown-led loss making preceding quarters. As such, 2022 will be a better year after the tough 2020-2021 period. In all, we still rate the sector OVERWEIGHT with TOP PICKs being GENTING for its deep value coupled with it being the beneficiary from the recovery plays of GENM and GENS as well as the new RWLV casino, and BJTOTO for its attractive dividend yield.

A recovery play; OVERWEIGHT retained. It is almost two years since the outbreak of COVID-19 that turned the world upside down with numerous lockdowns. And, gaming sector is one of the hardest hit sectors especially the casino operators. Nonetheless, with the reopening of Resort World Genting (RWG) in end-Sep 2021 and NFO outlets in mid-Sep 2021 and COVID-19 is now treated as endemic, we believe the sector would be a major beneficiary of recovery play in 2022. We still prefer GENTING (OP; TP: RM6.38) over GENM (OP; TP: RM3.41) for its deep valuation as well as it to benefit from the recovery plays on GENM and GENS (Not Rated) and the new wholly-owned casino Resort World Las Vegas (RWLV). For income seekers, NFOs are still the best yielding stocks for sustainable attractive dividend yield of >6% and BJTOTO (OP; TP: RM2.23) is our preferred pick and Top Pick for 1QCY22 Investment Strategy. Maintain OVERWEIGHT on the Gaming Sector.

Casino: a better 2022. With the reopening of RWG and the significant improvements in Genting UK and USA units after the reopening/relaxation of operating restriction since 2QFY21, GENM is highly likely to turn around in 2022 after two years of loss making which also resulted in GENTING reporting dismal results. With the success of Langkawi travel bubble pilot project as well as the vaccinated travel lanes (VTL) between Malaysia and Singapore, we believe border reopening is near which should benefit RWG and turn GENM profitable again. Meanwhile, the new outdoor theme park Resort SkyWorlds is expected to be a major driver for non gaming revenue for GENM. On the other hand, GENS’ earnings are expected to improve further with the implementation of VTL which currently allows fully vaccinated travellers from 24 countries, double from 12 just a month ago, to enter Singapore without quarantine. There are more countries expected to list in the VTL and this will hasten economic recovery in the island-state which should benefit GENS as well. As such, a recovery to pre-pandemic level is likely to be seen in 2022. In all, GENTING is expected to benefit from the reopening of GENM and GENS and from the new wholly-owned Resort World Las Vegas.

NFO: ticket sales to recover making its attractive dividend yield sustainable. While recovery in ticket sales post MCO 3.0 re-opening has been slow, initially booking 50%-60% of pre-COVID level to 70%-75% currently against 80%-85% prior to the lockdown, we believe the worst is over for NFO operators BJTOTO and MAGNUM (MP; TP: RM1.96) as there is unlikely another lockdown given COVID-19 now treated as endemic. We are now expecting a recovery to 80%-85% level in 1HCY22 before a fully recovery in 2HCY22. Meanwhile, Kedah state government has banned NFO outlets in the state which is expected to have minimal impact on the NFO operators given the small numbers of NFO outlets in Kedah. BJTOTO has only 20 outlets in Kedah, which makes up <3% of the total 680 outlets throughout the country while MAGNUM has 13 outlets or <3% of the group’s total outlets of 485. In view of small population of non-Muslim there, the actual impact to ticket sales could be even lower than <3%. Together with the one-off prosperity tax in 2022, we have imputed 12%-14% earnings downside to CY22 profit forecasts. Having said that, as businesses have already resumed post MCO 3.0 lockdown with ticket sales to pick up swiftly, both NFOs will resume its dividend distribution for attractive yield of >7%.

To turn around in 4QCY21; a better year ahead in 2022. With RWG already reopened from end-Sep, we expect losses to narrow QoQ further but this should be further helped by the improved operating environment in its UK and US units. In addition, GENS will see better earnings with the relaxation of cross border travelling and operation restrictions. Thus, this will eventually benefit parent-co GENTING. Likewise, NFO operators are expected to turn profitable in the upcoming 4QCY21 after the lockdown-led loss-making period in the preceding quarter, albeit with slower-than-expected recovery in ticket sales, while the continuous enforcement clamping down on the illegal operators should help to improve ticket sales on the longer term. Overall, we expect a meaningful recovery for the industry players in 2022 and a full recovery from 2023 onwards.

Source: Kenanga Research - 28 Dec 2021

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