Still game for a compelling bet

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Gaming sector
Maintain “overweight”.
All four gaming stocks reported weaker results with Genting Bhd (Genting) and Genting Malaysia Bhd coming below expectations while two other stock coverages were broadly in line.

Genting’s second quarter financial year 2014 (2Q14) results were hit badly by disappointing Genting Malaysia’s results and weakening crude palm oil (CPO) prices.

In fact, almost all of Genting Group’s casino operations, such as those in Malaysia, Singapore and the United Kingdom, faced poorer luck factor which saw their profit margins crimped.

On the flipside, Resort World Sentosa, Singapore continued to expand its VIP market share at the expense of Marina Bay Sands, Singapore while its North American operations, Resort World New York City and Resorts World Bimini, Bahamas reported improved results, thanks to higher business volumes.

While Magnum Bhd (Magnum) recorded poorer luck factor, Berjaya Sports Toto Bhd (BJToto)’s 1Q15 results were hit by weaker-than-expected number forecasting operator (NFO) ticket sales due to lesser draw days despite normalised luck factor.

For the casino, the heat is still on. After unveiling details of Resort World Las Vegas (RWLV) in 2Q14, the Genting group was busy putting up three bids, competing with another 14 bids from other parties, for new casino licences in the New York state in end-June.

Two bids were submitted via Genting Malaysia’s indirect subsidiary, RW Orange County LLC in New York City, to build casinos, one in Tuxedo worth US$1.5 billion (RM4.9 billion) and another in Montgomery, both in Orange County.

On the other hand, the Lim family-controlled Nasdaq-listed Empire Resorts Inc put up a proposal to build a US$1 billion casino in the Sullivan County in New York.

Currently, the New York Gaming Facility Location Board is reviewing the 17 applications for four casino licences in three regions with the outcome expected in October or November. As such, the Genting group is expected to be kept busy with the bidding process in Japan and United States within the next six to 12 months.

NFO is still a compelling valuation with attractive yields. BJToto continued to edge up Magnum in terms of market share in the second quarter calendar year 2014 (2QCY14) as the former had RM72.2 million in extra NFO ticket sales over the latter compared with RM36.6 million in the preceding quarter, despite weaker sales due to Chinese New Year factor in 1QCY14.

On the other hand, the two NFO stocks continued to perform poorly in the past three months where BJToto fell 3% over the quarter, while Magnum dipped less than 1% over the period. This is against the performance of FBM KLCI which dipped more than 2% over the same period.

In all, we still believe that the NFO stocks are trading at compelling valuations of 13 times to 14 times which is at multiple-year lows. This is fairly attractive given their defensive earnings profile and highly regulated industry. In addition, they also offer yields as high as 6% to 7%, which is among the highest on Bursa Malaysia.

While earnings growth is expected to be less exciting for NFO, income-seeking investors may find value in BJToto and Magnum, given their attractive yields at current valuations, which are at multiple-year lows.

While both have “outperformed” calls, we prefer BJToto over Magnum, given the former’s fairly stable quarterly earnings trend over the latter.

Genting remains our top pick for the sector, given the exciting new casino market story, such as South Korea and Japan, as well as the new RWLV casino.

On the other hand, while we like the Genting Integrated Tourism Plan story and the potential new casino in New York State, we believe Genting Malaysia is currently trading at “fair” value. — Kenanga IB Research, Oct 2

This article first appeared in The Edge Financial Daily, on October 3, 2014.