Defensive gaming sector looks a good bet

Recovery: NFO sales have steadily climbed to between 80% and 85% of pre-MCO levels in September since outlets re-opened on June 17.

PETALING JAYA: The gaming sector looks like a fairly safe bet for those looking to deploy a more defensive investment strategy, said CGS-CIMB Research, which has an “overweight” rating on the sector.

The report noted that number forecast operator (NFO) sales have steadily climbed to 80% to 85% of pre-movement control order (MCO) levels in September, since outlets re-opened on June 17.

The research unit said this should be faster than recovery in casino volumes, thanks to NFO outlets’ closer proximity to punters, non-reliance on foreign tourism and lesser impact of social distancing measures on operating capacity.

Also, while illegal NFOs have been the main drag on legal NFO sales since 2010, the latter has seen a slight 2.9% growth year-on-year in 2018 and 2019 as authorities stepped up enforcement against illegal NFOs.

This has continued in the first seven months of 2020, with 3,015 raids on illegal gambling dens and the crippling of 61 syndicates (compared with 32 in 2019).

The research unit also projected Magnum Bhd and Berjaya Sports Toto Bhd’s (BST) dividend yields to rebound to an attractive 7.3% to 7.6%, and 7% to 7.7% respectively in financial years 2021 and 2022 (FY21F and FY22F) as earnings recover from Covid-19 and payout ratios revert to FY19 levels of 95%.

Potential risks are the government hiking NFO gaming tax or pool betting duties in Budget 2021 on Nov 6.

These were last raised in 1998 and 2010, respectively.

In this event, if NFOs are allowed to lower the prize payout and NFO sales are hit by 2%, the research unit estimated it would lower Magnum’s FY21F and BST’s FY22F core earnings per share by 2.7% and 2.6% respectively, and dividend yields by 0.2%.

CGS-CIMB Research has “add” calls on Magnum and BST, and target prices of RM2.35 for both NFOs.

The brokerage also has an add call on Genting Malaysia Bhd, with a target price of RM2.70.

The research unit said it prefers Magnum over BST as it is a pure NFO play.

Magnum may also benefit from the monetisation of its 6.3% stake in U Mobile via a potential IPO (initial public offering) in the next 12 months.

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