• OVERWEIGHT; Top Pick: Genting. While casino operators’ earnings generally underperformed estimates due to a slower-than-expected rebound, their recovery continues to progress forward, as countries transition towards living with COVID-19. Meanwhile, the recovery in number forecast operators’ (NFOs) ticket sales seems to be slower than anticipated, but the worst should be over – given the end of movement restrictions and the resumption of economic activity.

• Genting Malaysia’s (GENM) numbers fell short of expectations mainly due to lower-than-expected 1Q22 revenue, amid a high number of COVID- 19 cases and the hold percentage from Malaysia. However, its operating metrics pointed to an encouraging recovery. Its gaming and non-gaming revenues were at c.68% and c.59% of pre-pandemic levels. Due to the shortage of workers, Resorts World Genting’s hotel only opened 5,000 of its 10,500 available rooms and was running at an 88% occupancy rate. Genting SkyWorlds had an encouraging c.3,000 daily visitors (maximum: 20,000 daily) in April/May.

• Genting (GENT) also disappointed, as GENM and its power segment’s underperformance outweighed the outperformance of Genting Plantations (GENP MP, SELL, TP: MYR7.35) and its oil & gas segments. In 1Q22, Resorts World Las Vegas’ (RWLV) activity meaningfully picked up – its hotel occupancy rate started at 54% in January, and ended at 85% in March. In March, visitor volume rose 50% YoY, and convention attendants jumped >100% YoY, likely on the gradual resumption of meetings, incentives, conferences and exhibitions or MICE events.

• Magnum missed expectations, as its revenue fell short, at 20% of our full year forecast. The disappointing earnings were mainly due to: i) Softer than-expected ticket sales, and ii) higher-than-expected prize payouts. Ticket sales remain at 70-80% of pre-pandemic levels, likely as punters: i) Are financially worse-off post lockdowns, ii) turned to Sports Toto during its historic 6/58 jackpot run, and iii) have increasingly turned to illegal NFOs. Its 1Q22 DPS of 1 sen was well short of our FY22 estimate of 13 sen.

• Sports Toto (SPTOTO) outperformed, mainly due to the stronger-than expected contribution from its UK motor dealership segment. This, in turn, was due to stronger-than-expected used car profit margins, fuelled by strong demand and tight supply. However, its interim DPS of 2 sen brought 9MFY22 DPS to 4 sen – below our FY22 forecast of 8 sen – as the stronger motor segment does not directly lead to dividend payouts.

• Forecasts and outlook. Post results, we trimmed GENM’s FY22-24F earnings by 10-3%, GENT’s by 13-2%, and Magnum’s by 30-15%. We lifted SPTOTO’s FY22 earnings by 3% on stronger motor sales and margins. Despite a disappointing 1Q22, we maintain our OVERWEIGHT rating on the sector, as the casinos’ recovery is still on track and they should see better future earnings, given the reopening of borders and resumption of tourism activities in key markets in 2Q22. The NFOs’ ticket sales recovery may be slower than expected, as some punters are likely financially worse off and may continue relying on illegal operators. Nevertheless, the NFOs’ earnings and dividends should continue to recover in the subsequent quarters along with the economic recovery.

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

Source: RHB Securities Research - 9 Jun 2022