• Still OVERWEIGHT; Top Pick: Genting (GENT). On 30 May, ChinaPress reported that the number of special draw days allowed in 2022 has been increased to 22 days from 11 days. We are positive on this development, as it should help lift ticket sales for the number forecast operators (NFOs), and provide a much-needed boost to the sector, which has been adversely affected by COVID-19. While it commands lower margins, the higher number of special draw days is earnings accretive for both NFOs under our coverage.

• Increase in special draws. On Monday, ChinaPress reported that the number of special draw days allowed in 2022 has been increased to 22 days from 11 days. The news article quoted sources from the NFO industry. To recap, when the Pakatan Harapan administration took office in 2019, it reduced the number of special draw days to 11 from 22, and further slashed it to eight days in 2020. The Government later increased the special draw days back to 22 in 2021. However, owing to the movement restrictions during the year, there were only 15 special draw days in 2021. The Government then reduced the special draw days to 11 for 2022. Based on the ChinaPress report, there will be a resumption to 22 special draw days this year. As there have only been five special draws YTD, this suggests that there will be 17 more in the remaining months of the year. Figure 1 is a snapshot from the news article that illustrates the remaining special draws days this year.

• Shoring up Government coffers. Special draws tend to be of lower margin vs normal draws, as the NFOs need to pay an additional 10% tax as a special contribution to the Government on all special draw gross ticket sales (after deducting the 8% gaming tax). Historically, the Government has turned to special draws to shore up its coffers.

• Forecasts. After raising the number of special draw days to 22 in 2022 and for all future years, we increased Magnum's FY22-24F earnings by 2-3% and Sports Toto’s (SPTOTO) FY22-24F earnings by 1-2%. We note that there is greater earnings accretion for Magnum, as it is a pure-play NFO, while SPTOTO has other segments, such as its UK motor dealership.

• We stay OVERWEIGHT on the sector, as we believe casinos and NFOs stand to benefit from the reopening of borders, return of foreign workers, and continued economic recovery. Our Top Pick for the casinos is GENT, for its attractive 6.4x EV/EBITDA valuation vs regional peers' 11x. The continued economic recovery, resumption of tourism activity, and sustained high commodity prices should benefit all of GENT’s key segments. Among NFOs, we prefer SPTOTO – apart from its continued ticket sales recovery, we also like the growth exposure from its other segments, such as its UK motor dealership and hotel & gaming businesses in Berjaya Philippines.

• Key downside risks for the sector include a fluctuation in the luck factor, changes in government policies, and a prolonged pandemic.

Source: RHB Securities Research - 1 Jun 2022