A MIXED bag of fortunes awaits the gaming industry in the year ahead.
After two dismal years, at least three catalysts could play out in 2020, and work in the industry’s favour.
They include the award of integrated resorts licences in Japan in the second half of next year, which could benefit diversified gaming conglomerate GENTING BHD, the opening of an outdoor theme park in Genting Highlands in the third quarter amid Visit Malaysia Year 2020, which could drive interest in Genting Malaysia Bhd (GenM) and the clampdown on illegal number forecast operators (NFOs), which could help boost ticket sales of BERJAYA SPORTS TOTO BHD (BToto) and Magnum Bhd.
Overall, Malaysian NFOs and casinos will still need a little bit of luck to capitalise on the positive factors.
As it stands, analysts are largely negative in their outlook for the industry in 2020.
In terms of stock recommendations for the industry, Genting appears to command the upper hand.
For perspective, of the four brokerages polled by StarBizWeek, three have “buy” calls for Genting, citing the counter’s beaten-down valuations, while one recommends a “hold”.
As for GenM, all four have “hold” calls, while BToto gets three “hold” calls and one “buy” call.
Among the gaming stocks on Bursa Malaysia, Genting seems to be the underperformer, with a year-to-date (y-t-d) gain of only 1.3% in its share price.
This compared with GenM’s share price, which has risen 11.5% y-t-d.
In the NFO space, BToto has gained 23.2% y-t-d, while Magnum is up 30.8% ytd.
Compelling value in Genting
While 2020 could remain a challenging year for Genting amid declining gaming profits, the successful expansion of its 52.7%-owned Genting Singapore Ltd (GenS) into Japan could lift sentiment towards the stock, according to analysts.
GenS is one of the three bidders for integrated casino resort (IR) licences in Japan. TA Research notes there will be three IRs in Japan, one each in Osaka, Yokohama and Tokyo. The selection of winner will be announced in the second half of 2020.
Putting its bet on Genting winning a casino licence in Japan via GenS, TA Research reiterates its “buy” recommendation on Genting, with an unchanged target price of RM6.85.
“It will have an enormous lottery effect if our expectation is materialised, ” the brokerage explained.
Sharing a similar view, Maybank Investment Bank (MIB) Research says should GenS win a casino licence in Japan, it will be a major boost for the company as well as the latter’s major shareholder Genting. Nevertheless, the brokerage has a “hold” call on Genting, with a target price of RM6.30.
Conversely, Public Investment Bank Research (Public Invest) maintains its “outperform” call on Genting for the counter’s compelling valuations, with the stock currently trading at around 12 times forward earnings.
Public Invest notes Genting’s valuation has been affected by corporate governance issues relating to the acquisition of loss-making Empire Resorts Inc in the United States by its 49.3%-owned GenM.
“But in the medium term, catalysts for Genting include GenS possible venture into Japanese gaming market, expansion of Resorts World New York and completion of integrated resort in Las Vegas, ” it says.
Meanwhile, CGS-CIMB Research points out that Genting is its only “add” recommendation within the gaming sector. Its target price for the counter is RM7.80.
The brokerage says it favours Genting for its diversified and defensive businesses, which include plantation and power generation, as well as the attractive valuation of its share price at 12 times forward earnings.
Nevertheless, CGS-CIMB Research reckons 2020 could be a challenging year for Genting if its domestic and Singapore gaming profits continue to fall over the next few quarters, noting that gaming contributes 85% to the conglomerate’s earnings annually.
“Lower gaming profits could have been affected by softer consumer sentiment due to the ongoing US-China trade war, ” it says.
Earnings risk for GenM
The opening of a new outdoor theme park in Genting Highlands could create some excitement for GenM.
However, the company continues to face earnings risk from the inclusion of loss-making Empire Resorts. Recall, GenM completed the acquisition of a 49% stake in Empire Resorts for US$129mil last month.
According to MIB Research, Empire Resorts could generate losses of RM193.1mil for GenM in the financial year (FY) ending Dec 31,2020.
“This will moderate any positive impact that the outdoor theme park will have on GenM’s earnings. All in all, we expect GenM’s core earnings to fall 24% in FY20, ” the brokerage says.
It recommends a “hold” on GenM, with a target price of RM3.30.
Similarly, TA Research, which says Empire Resorts losses could offset rising non-gaming revenues for GenM, has a “hold” call on the company, with a target price of RM3.27.
CGS-CIMB, which has a “hold” call and target price of RM3.10 for GenM, says it will take some time for the group to turn around Empire Resorts’ operations.
Noting that GenM has invested nearly US$1bil in the upcoming outdoor theme park, it says, however, GenM has not indicated whether new capital expenditure is needed for the development.
Even so, the opening of the theme park is seen as a share price catalyst for GenM, says Public Invest, which has a “neutral” rating on the counter, with a target price of RM3.35.
Regulatory boost for NFOs
According to CGS-CIMB Research, 2020 should be a better year for the NFO industry in view of the government’s enhanced effort to clamp down on illegal operators.
“In 2019, the government clamped down on illegal NFO operators, which helped the legal NFO industry to recover and grow 2%-3% after a few years of flat or declining sales. This trend should continue in 2020. We expect NFO industry sales to rise by another 2%-3% in 2020, ” the brokerage says.
On that note, it maintains its “hold” recommendation on BToto, with a target price of RM2.62, backed by the counter’s attractive 6.2% dividend yield
While NFO special draws have been further reduced for next year, CGS-CIMB Research expects the impact on earnings to be minimal.
“Fewer special draw days only had a minimal impact on NFO net profit as margins for special draws are substantially lower than normal draws’ margins because of the additional 10% tax imposed, ” it explains.
Under Budget 2020, the government had directed the number of special draws to be cut to eight from 11 next year.
According to MIB Research, special draws not only generate 10%-15% less sales than normal draws for NFOs, their net profit margins are also less than 5%, as they incur a 10% special contribution to the government on sales less gaming tax.
“We expect the cut in the number of special draws to trim our earnings estimates for Magnum and BToto by only 1% per annum. Going forward, we expect gross NFO industry sales/draw to grow 2% in 2020. That said, there could be upside should enforcement against illegal NFOs be ramped up even further, ” the brokerage explains.
MIB Research has a “buy” call on BToto, with a target price of RM2.50, and a “hold” call on Magnum, with a target price of RM2.08.
TA Research, on the other hand, has downgraded BToto to “hold” from “buy” previously, with an unchanged target price of RM2.93.
“We believe the market has significantly priced in the positive measures announced in Budget 2020, that is, stern penalties on illegal gambling”.
Meanwhile, Public Invest says although the imposition of higher penalties and jail terms should deter the proliferation of illegal gambling activities, enforcement remains the key in ensuring the effectiveness of this measure.
“We note that ticket sales for NFOs have improved in recent quarters, largely due to the clamping down of illegal 4D outlets, but online activities remain rampant and more difficult to control, ” it argues.
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