We maintain OVERWEIGHT on the gaming sector, a major beneficiary of the reopening of the economy and international borders. Casino operators disappointed in the recent 4QCY22 results season largely due to unfavourable forex movements, and for GENTING (OP; TP: RM5.86) which was affected by weak plantation profits, while their casino operations saw improved performance across geographical areas. Meanwhile, number forecast operators (NFOs) beat expectations with tickets sales returning to 69% to 82% of pre-pandemic levels. Our sector top picks are GENTING, being a proxy to the recovery in the tourism activities both in Malaysia and Singapore, backed by the return of Chinese tourists, and SPTOTO (OP; TP: RM1.95) by virtue of its attractive dividend yield of c.11%.

High five for NFOs. From earnings disappointment across the board last quarter, the two NFOs in our coverage surprised to the upside in the recent 4QCY22 results season, while casino players continued to miss expectations. SPTOTO’s 1HFY23 results topped forecasts, driven by higher-than-expected investment-related and associate income, as well as lower minority interest. In addition, though ticket sales in 2QFY23 were at 82% (1HFY23: 80%) of pre-pandemic levels, it was still within the targeted recovery rate of 80%-85%. However, its UK-based luxury car distributor HR Owen continued to report lacklustre earnings (2QFY23 operating profit: -82% QoQ/-85% YoY) due to declining car sales. The FY22 results of MAGNUM (OP; TP: RM1.39) also beat our forecast by 10%, driven by lower-than-expected interest expense and minority interest. In fact, its 4QFY22 net profit of RM37.5m (+87% QoQ/+83% YoY) was the best quarterly result since the pandemic started almost three years ago. This was on the back of 6% hike in ticket sales. 4QFY22 ticket sales was at 69% (FY22: 70%) of pre-Covid-19 levels.

Casino operators missed. GENTING’s FY22 results missed our forecast substantially by 47% as GENM (OP; TP: RM3.56) slipped into the red in 4QFY22 due to forex translation losses on its USD-denominated bond while GENP (MP; TP: RM5.50) was hit by high production cost. However, the group’s casino operations reported a broad-base improvement from all geographical areas with adjusted EBITDA jumping 1.5x YoY in FY22 following the reopening of international borders from 1 April 2022. Likewise, GENM’s adjusted EBITDA for its Malaysia operations surged to RM2.11b from RM62.5m while the earnings of GENS (Not Rated) jumped 76%. GENM’s operations in UK & Egypt and North America reported higher earnings, by 28% and 56%, respectively.

Maintain OVERWEIGHT. We expect visitors arrivals at integrated resorts for both GENM and GENS to continue to recover in 2023, particularly with China’s reopening early this year. With this, GENTING remains our top pick over GENM as the former is a proxy to the recovery of tourism activities in both Malaysia and Singapore, and has a more diversified earnings base that includes plantation. On the other hand, for NFOs, we prefer SPTOTO to MAGNUM as it has a better recovery path for ticket sales to 87% of pre-pandemic level in FY23 (FYE: June) and 90% by FY24 whereas MAGNUM is only expected to see its ticket sales recovering to 78%/80% in FY23/FY24 (FYE: Dec) as we expect the return of its customers predominantly in the older-age group to be gradual. In addition, SPTOTO also offers higher dividend yield of c.11% vs. 8% of MAGNUM.

Source: Kenanga Research - 10 Mar 2023