This article first appeared in The Edge Financial Daily on July 4, 2019
Gaming sector
Maintain overweight: Both Genting Bhd (“outperform” [OP]; target price [TP]: RM7.65) and Genting Malaysia Bhd (OP; TP: RM3.80) saw their shares rebounding remarkably by 9% and 8% respectively in the month following the release of their first quarter of 2019 (1Q19) earnings, which showed that the impact of the casino tax hike was not as bad as overly pessimistic investors had earlier feared. While the withdrawal of a judicial review against the ministry of finance on lengthening the tax allowance utilisation period from 10 years for the Genting Integrated Tourism Plan would negatively impact short-term earnings, we are not overly worried as the total tax allowance amount remains unchanged. The group’s UK and North America operations posted improved results, while Genting Singapore (“not rated”) experienced lower business volume given the challenging business environment. While remaining optimistic about the mass market segment, the management has turned cautious about the VIP business, especially those from mainland China over an uncertain economic environment. The soon-to-commence Japan’s integrated resort bidding process will be the main attention for now.
Numbers forecast operator (NFO) players continued to post meaningful sequential improvements in ticket sales in the latest quarterly results, which were partly attributed to the Chinese New Year (CNY) effect. In fact, Berjaya Sports Toto Bhd’s (BToto) (OP; TP: RM3) fourth quarter of financial year 2019 (4QFY19) average ticket sales per draw of RM21.7 million was the highest since 4QFY13, while Magnum Bhd’s (“market perform” [MP]; TP: RM2.55) 1Q19 average ticket sales per draw of RM19.6 million was also the highest in six years since 1Q13.
Both operators also conducted lesser draws of 41 to 42, compared with the usual 45 to 47 per quarter previously, given the cut in special draws to 10 draws per year effective 2019 from 20 to 22 draws previously. Total ticket sales will come off, but it has had a minimal impact on the bottom line as these special draws come with a 10% additional tax that caps profitability, the effect of which we expect to be a mere 2% to 3% reduction in earnings. The luck factor, fairly stable in the past three quarters, remains the key determining factor of the players’ earnings.
The sector reported a good set of results for the 1Q19 earnings season.
Although the casino numbers missed our optimistic estimates, they were better than the consensus. Both Genting Malaysia and Genting Singapore’s earnings for 1Q19 were better sequentially owing to a better luck factor with improved business volume for the premium business. BToto and Magnum reported strong numbers, which matched expectations, as the enforcement’s clampdown on illegal operators appeared to have had the desired effect. Going forth, we may see weaker sequential business volume for 2Q19 after the seasonally strong CNY-led quarter. For the casino operators, the outlook is mixed, with Genting Singapore facing challenging business conditions clouded by trade and geopolitics tensions, and the gaming tax hike eating into Genting Malaysia’s profit margin. Nonetheless, we believe the continuous clampdown on illegal operators will help to boost ticket sales of the legal NFO players.
Although the sector has performed well since the end of last year, especially for the NFO players, in terms of share price movement, we believe there is further upside. We have decided to remove the 10% discount to sum-of-parts (SoP) valuation of Genting Malaysia given the clearer picture of the gaming duty hike. Having adjusted for a total of about RM4.98 billion potential impairment in the SoP calculation, we believe our valuation is rock solid.
As such, Genting Malaysia’s TP has been raised to RM3.80 from RM3.40 previously, leading to an upgrade in Genting’s TP to RM7.65 from RM7 previously. Both stocks remain OP. While keeping our TP of RM2.55 for Magnum, we cut the stock to MP given that the 11% run-up in the past month has put it in the fully valued zone. Meanwhile, BToto remains our top pick for the sector given its attractive valuation of 13 times FY20 price-earnings ratio and over 6% net yield. — Kenanga Research, July 3