Gaming - Looking To A Better 2016

We still like gaming stocks for their attractive valuations, being the market laggards in the past 2-3 years. GENTING looks fairly attractive for its deep valuation, which trades at 41% discount to its SoP valuation while BJTOTO is at multiple-year’s low of 11x earnings multiples with one of the best yields at 7%-8%. We expect a better year in 2016 for the players in anticipation of recovery in business volume and luck factors. In all, we continue to prefer NFO players over casino operators given the formers’ supernormal dividend yields of 6%-8% while for the latter, GENTING especially is affected by the lacklustre performance from GENS. We maintain our OVERWEIGHT rating for the sector while BJTOTO remains our TOP PICK.
Still OVERWEIGHT on valuations. Except Genting Malaysia Bhd (GENM, UP; TP: RM4.26), all gaming stocks saw another lacklustre year in 2015 with share prices contracting 7%-19% over the year after the 11%-14% decline in 2014. This was mainly attributable to the GST as well as their non-shariah status while foreign funds also have little interest in the sector. However, this sector offers deep value like Genting Bhd (GENTING, OP; TP: RM8.52) and attractive yields such as Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM3.56) and Magnum Bhd (MAGNUM, OP; TP: RM2.93). GENTING is now trading at c.41% discount to SoP valuation, which could be a sign of bottoming out given its 10-year average discount of 30%. On the other hand, NFO players, such as BJTOTO are trading at their multi-year’s lows even after we trimmed their earnings estimates recently. BJTOTO continues to be our TOP PICK for the sector for its dividend yield and defensive earnings. OVERWEIGHT for the sector maintained.
NFO: it is always about valuation and yield. We trimmed BJTOTO and MAGNUM earnings recently as we were too bullish on ticket sales even after adjusting for the 6% GST. As such, we see little earnings risk for now unless there is a big swing in luck factor to the downside. Post earnings revision, valuations for both stocks remain undemanding at 11x-14x earnings multiples. This is especially so for BJTOTO as it is trading at its multiple-year’s lows. Given that the gaming sector is highly regulated and matured, earnings prospect remains unexciting and we expect ticket sales to grow at 2%-3% annually with their usual 20 extra special draws each year while the luck factor is the determining factor for bottom line. However, one should also look into the attractive yields that are as high as 6%-8% which is among the highest on Bursa Malaysia.
Casino: GENM is the focus in 2016. With Phase 1 of Genting Integrated Tourism Plan (GITP) in its final leg of completion in 2H 2016, GENM is likely be the focus as the 10-year RM5b revamping program is a major catalyst to Resorts World Genting. The prime attraction will be the first full-scale 20th Century Theme Park, which will be ready by end-2016/early-2017, and will definitely change the image of RWG as the new face of holiday theme park destination in the region with its cool climate as part of the selling point. Although we are not certain if RWG is allowed to expand its casino floor, all the new addons should help to bring in more footfalls, which could help to boost casino traffic. Meanwhile, there is no development from Japan regarding the liberalisation of the gaming industry there while the construction of Resorts World Jeju is on track to open progressively from 2017 and to complete by 2019. In Singapore, Resorts World Sentosa lost its market leader status to its sole rival Marina Bay Sand for the third consecutive quarters with the market share for VIP rolling chip volume falling further to 40% in 3Q15 from 47% in 2Q15. This was mainly attributable to the sharp decline in Chinese VIP arrivals. As such, Genting Singapore plc (GENS, Not Rated) has switched its focus to the mass market since three quarters ago.
Looking to a better 2016. Generally, gaming companies had a bad year in 2015 given the slowdown in business volume coupled with the absorption of GST. In addition, the luck factor was also not in their favour. As such, we expect a better 2016 for the players with expectations of recovery of business volume and the normalisation of luck factor. Earnings of BJTOTO, GENTING and GENM were badly hit in 2015, with the abovementioned expectations, we could see a moderate improvement in 2016 which we estimate 10%/10%/17% earnings growth for them, respectively. On the other hand, MAGNUM will be the only gaming stock to post flattish earnings growth of <1% in 2016 as it is the only company with earnings growth of <2% in 2015. Operationally, GENM could continue to enjoy stable earnings on the resilient RWG’s earnings while the North American operations, especially RWNYC should be able to drive the US-based earnings higher while RWB’s new 300-room luxury hotel is expected to reduce its operating loss and break even in 2H15. However, the UK operations could continue to see tougher times due to its VIP-centric nature. Meanwhile, GENS’ prospects remain challenging given the decline of visitor arrivals from the high-roller segment from China.
Source: Kenanga Research - 6 Jan 2016