We maintain OVERWEIGHT on the gaming sector which is angled as a major economy reopening play. Expectation-wise, there was a slight sequential deterioration in the recently concluded 2QCY22 results season but we do not find this alarming, as we believe the recovery of the gaming sector on the economy reopening is a matter of “when” and not “if”. We expect visitor arrivals at integrated resorts and ticket sales of NFOs to continue to recover in 2HCY22 as the pandemic moves towards an end. However, we are mindful of the sustained high inflation that is eating into consumer spending power. Our top picks for the sector are GENTING (OP; TP: RM5.86), being a proxy to the recovery in tourism in both Malaysia and Singapore, and SPTOTO (OP; TP: RM2.13) by virtue of its attractive dividend yield of 8%-9%.

Chips still down. While all four gaming companies under our coverage disappointed in 2QCY22, vs. one above and three below in the preceding quarter (see table below), we do not find this alarming as we believe the recovery of the gaming sector on the economy reopening is a matter of “when” and not “if”. GENM (OP; TP: RM3.64) returned to the black as visitor arrivals rose 32% QoQ to 5.4m in 2QFY22 (but still fell short of our expectation) as international borders reopened from 1 April 2022. Meanwhile, its operations in the UK and Egypt reported flattish performance sequentially, while its North American operation saw earnings growth of 58% QoQ. On the other hand, there was not quite the economy reopening boost at GENTING as GENS’s (Not Rated) as earlier anticipated due to visitor arrivals being capped by limited availability of flights and exorbitant airfares. On the other hand, the recovery of ticket sales of NFOs were uneven with SPTOTO returning to 82% of pre pandemic levels, while MAGNUM (MP; TP: RM1.59) trailed at only 71%. Each of them also has its own unique dampener in their results - SPTOTO’s UK-based luxury car distributor HR Owen reported disappointing earnings while MAGNUM was hit by abnormally high prize payout ratio of close to 70% vs. the theoretical 67%.

Maintain OVERWEIGHT. We expect visitors arrivals at integrated resorts and ticket sales of NFOs to continue to recover in 2HCY22 as the pandemic moves towards an end. However, we are mindful of the sustained high inflation that is eating into consumer spending power, potentially hurting visitors arrivals at integrated resorts and ticket sales of NFOs. We prefer GENTING to GENM as the former offers proxy to the recovery in tourism in both Malaysia an Singapore, and has a more diversified earnings base including plantation. We prefer SPTOTO to MAGNUM as the former offers a more attractive dividend yield of 8%-9% vs. 4%-6% of the latter.

Source: Kenanga Research - 8 Sept 2022