• OVERWEIGHT. At Resorts World Genting (RWG), tourists and gamblers are back, which should fuel a meaningful sector earnings recovery in the coming quarters. While we think that gaming and non-gaming revenues, and number forecast operators’ (NFO) ticket sales should continue recovering towards pre-pandemic levels, we highlight that inflation may dampen consumers’ discretionary spending. Nevertheless, the casinos’ undemanding valuations of 6-8x FY23F EV/EBITDA and NFOs’ attractive yields of c.7% provide a defensive proposition amidst market uncertainty.

• The return of tourists and gamblers. From our recent ground checks at RWG on a Wednesday afternoon, we found that hotel rooms are fully booked for the weekends. We were also pleasantly surprised by the large casino crowd on a Wednesday afternoon. As Malaysia’s and Singapore’s borders have reopened, we think that RWG and Resorts World Sentosa (RWS) are likely ramping up efforts to attract tourists from the region.

• The casinos are beneficiaries of a weakening MYR, in our view. YTD, the USD has strengthened by c.6% against the MYR. With Genting Malaysia (GENM) typically earning 8-16% of its adjusted EBITDA from the US division (1Q22: 19%), and Genting (GENT) typically earning 6-10% of its adjusted EBITDA from the US (trailing 12-month average: 31%, 1Q22: 21%), the strengthening USD/MYR should translate into higher MYR earnings. As GENT's management is still ramping up the business at Resorts World Las Vegas (RWLV), its EBITDA contribution from the US should rise accordingly. A weaker MYR may also make Malaysia a more affordable tourist destination for foreign tourists, but we note that, historically, more than 80% of RWG's visitors are domestic tourists.

• Inflation casts a shadow. May's inflation in most of GENT and GENM's operating markets – Malaysia (2.8%), the US (8.6%), the UK (9.1%), Singapore (5.6%) – have been higher than expected. Given the discretionary nature of casino and leisure spending, we think that potentially persistent and high inflation rates and, as such, weakened consumer spending power, could adversely impact GENM's gaming and non-gaming revenues, as well as GENT's leisure and hospitality businesses.

• NFOs – slow recovery, but attractive yields. We gathered that ticket sales in 2Q22 were still at 70-80% of pre-pandemic levels – a sign of punters’ continued weakened financial conditions and reliance on illegal operators. While we think that inflation may drag on ticket sales, we highlight that Magnum offers a dividend yield of 6.7%, and Sports Toto (SPTOTO) offers 7.2%, which we think are attractive amidst market uncertainty.

• Top Pick: GENT. GENT’s leisure and hospitality businesses should continue to recover with the on-going resumption in tourism activity. Its plantations and oil & gas units stand to benefit from elevated ASPs stemming from high commodity prices. Its 6.3x FY23F EV/EBITDA is attractive vs the regional peer average of 12x, and any additional value accretion from GENT’s 20%-owned TauRx Pharmaceuticals is a plus point. Among the 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 risks to the sector include a fluctuation in luck factor, changes in government policies, and a prolonged pandemic.

Source: RHB Securities Research - 14 Jul 2022