KUALA LUMPUR (Dec 30): RHB Investment Bank Bhd (RHB Research) has maintained its “overweight” rating of the gaming sector, supported by brighter prospects in 2022.
“The recent dip in sector share prices due to Omicron concerns presents an opportunity for investors to accumulate, as we do not expect the impact to be as severe as in 2020-2021.
“Earnings recovery should pick up pace due to the easing of movement restrictions once the situation stabilises,” said the research house in a report on Thursday (Dec 30).
RHB Research said its top pick for casino operators is Genting Bhd, “due to its attractive 6.2x EV/EBITDA vs the regional peer average of c.13x, which provides investors a cheaper alternative to position for the tourism recovery play angle”.
The research house added that further upside could come from a stronger-than-expected contribution from Genting’s newly-launched Resorts World Las Vegas (RWLV), as the gaming group’s management mentioned that it is still at the early stages of ramping up business.
“A potential value-unlocking monetisation, via a listing exercise, is another major upside catalyst,” RHB Research wrote on Genting’s prospects.
The research house maintained its "buy" call on Genting with an unchanged target price (TP) of RM6.10.
RHB Research said it expects Genting and sister company Genting Malaysia Bhd (GenM) to return to profitability in 2022 as all their facilities are now open amid potential downside risk from Omicron to earnings recovery.
“Many countries are now better equipped and nimble in handling the pandemic. Coupled with the massive cost rationalisation efforts undertaken previously by the casino operators, these should partially cushion the impact. Both the casino operators will resume recovering after the Covid-19 situation stabilises,” said the report on Genting and GenM’s return to profitability.
According to RHB Research, there are potential upsides to the casino operators’ US operations as RWLV is expected to continue to see better earnings in the subsequent quarters as Genting ramps up the newly opened integrated resort's business, while GenM’s Resorts World New York City (RWNYC) could obtain a downstate commercial casino licence and provide further earnings upside as well as its Empire Resorts which remains on a positive trajectory to achieve better profitability, supported by its recent mobile sports betting licence win.
Meanwhile, RHB Research has picked Magnum Bhd as its preferred number forecasting operator (NFO) with a TP of RM2.58, giving it a 37.1% upside from current prices.
The research house opined that Magnum is a sturdy pure-play NFO business amid encouraging ticket sales recovery and expectations that it will continue to improve as the games are still popular among punters.
“Magnum’s FY22-23F dividend yield of c.7-8% is attractive for yield-seeking investors. Further upside to our forecasts include the potential introduction of stricter gambling laws,” the report wrote.
RHB Research highlighted that the NFO business is resilient as the “ticket sales are currently estimated to be at c.80% of pre-pandemic levels”, and it expects Magnum to continue its recovery and normalise by the first half of 2022.
It added the ban on outlets in Kedah will have minimal impact on the NFO’s earnings at around 3%, while further bans are unlikely to happen in other states, according to the research house, as there are significant annual tax contributions from the NFO industry at around RM2-3 billion per year.
The research house also noted that the key risks to the gaming industry might include “a fluctuation in luck factor, a prolonged pandemic, and changes in government policies”.
The report concluded with the key environmental, social and governance (ESG) issues plaguing the gaming sector, noting that “while environmental risks posed by casino and integrated resorts are not overly concerning, the gaming sector has been associated with social issues”.
“Casinos are often blamed for compulsive gambling habits, causing damage to families and individuals. Casino operators need to play their part in helping those who exhibit compulsive gambling behaviour.
“On governance, there have been instances where related-party transactions undertaken by Genting Malaysia (GENM) were perceived as unfavourable to minority shareholders. We believe appropriate measures should be taken to address this issue,” the report concluded.