UOB Kay Hian upbeat on gaming as NFOs restart operations

KUALA LUMPUR: UOB Kay Hian Malaysia Research is upbeat on the numbers forecast operators (NFOs) as they were allowed to start the first draws on Wednesday after a 3.5-month lockdown.

“With the nation’s encouraging vaccination milestones, we are optimistic that the NFOs will chart an uninterrupted swift earnings recovery and meaningful capital appreciation.

“Investors will again be attracted to the sector’s compelling risk-reward return, resilient cash flows and more than 6.6% lucrative yield. Maintain overweight,” it said.

UOB Kay Hian Research said with the nation’s vaccination rate expected to reach more than 80% for adults, NFOs were allowed to reopen for business from Sept 13, subject to having acceptable standard operating procedures (SOP) in place to ensure proper social distancing.

It also pointed out that as originally expected, the resumption of NFO businesses precedes the casino subsector - Genting Malaysia’s (GENM) casinos are still awaiting the authorities’ nod to resume operations, but “we expect the reopening to be imminent”.

The research house said the worst might be over for the NFOs as the nation progresses towards full and uninterrupted economy reopening. With the nation’s vaccination programme having reached an important threshold, the government has made clear its intention to restore a semblance of normalcy even without eradicating the virus, and we no longer expect strict lockdowns to be re-imposed.

The potential border relaxation and further lifting of Covid-19 restrictions will reinforce the NFOs’ expected recovery, led by both local patronage and foreign workers.

“Hence, we expect to see a steep earnings recovery from 4Q21 onwards,” he said.

It also pointed out while the NFO business model is defensive in nature, NFOs could benefit from pent-up demand of its relatively inelastic consumer base.

Magnum and Berjaya Sports Toto might potentially benefit from the “revenge spending”. Meanwhile, authorities’ effort to curb illegal operators will also be accelerated as the police forces step back from roadblock duties as the economy reopens.

“Maintain overweight on the gaming sector and NFO subsector. Investors will soon focus on the sector’s sustainable prospective dividends yields of more than 6.6%.

“We prefer Magnum for its pure exposure to the segment with a longer-term potential catalyst of U-Mobile monetisation.

“Maintain Buy on Berjaya Sports Toto and Magnum. We have upgraded Magnum’s target price to RM2.45 after adjusting for higher draw days for FY21.

"Our target price for Magnum implies 14x FY21F PE (historical mean: 14-15x PE) after inputting U-Mobile’s option value. Meanwhile, Berjaya Sports Toto’s target price of RM2.46 implies 14x FY22F PE," it said.

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