Gaming - OVERWEIGHT - 26 June 2012

2Q12 was an eventful quarter, which saw two NFO players unveiling their corporate exercises. However, the Genting companies reported a mixed set of news as while its plans to develop a convention centre in New York fell through in the quarter, it went on to invest in an Aussie casino and has since accumulated a 10% stake here. Meanwhile, the 1Q12 earnings report card showed that the gaming players were all coincidently hit by the luck factor as they turned in only expected results despite the quarter typically being a strong one due to the CNY factor. For the 3Q12 strategy, we recommend investors to switch their focus for the first time to the NFO segment from casino plays given the former’s more exciting restructuring plans and the fact that sentiment has turned sour on the latter due to the New York news.

MPHB is now our TOP PICK for the sector. We remain OVERWEIGHT on the sector.  Two diverse NFO corporate exercises.  Multi-Purpose Holdings Bhd (“MPHB”, OP; TP: RM3.72) has revealed its plan to demerge its gaming and non-gaming assets last month while Berjaya Sports Toto Bhd (“BToto”, OP; TP: RM3.88) also announced plans to list its NFO business in Singapore as a Business Trust. We like MPHB’s proposal, which will unlock its assets value but we expect a de-rating for BToto as the Business Trust listing will reduce its intrinsic value and cause an earnings dilution. This have prompted us to downgrade BToto immediately then to an UNDERPERFORM. The diverging share  price performances of the two stocks also appear to reflect the merit of the proposals in the eyes of investors. 

Casino stocks hammered down severely.  Both the share prices of Genting Bhd (“GENT”, OP; TP: RM11.69) and Genting Malaysia Bhd (“GENM”, OP; TP: RM4.18) took a dive by 17% from their recent highs after the news came that the plan to build a convention centre in New York fell through. However, this is likely just sentiment driven as their fundamentals remain intact. Meanwhile, Genting Singapore plc (“GENS”, NOT RATED) and Genting Hong Kong Ltd (NOT RATED) have bought a combined 10% stake in Australian casino, Echo Entertainment Group Ltd (“Echo”, NOT RATED), which should help to keep the interest up on GENT.   

No lady luck. While all gaming stocks reported in-line results in the recent reporting season, the players were all coincidently hit by poor luck factors. GENT posted a 1Q12 net profit which contracted 10% QoQ as unfavourable luck hit its non-VIP market in Resort World Genting  of GENM, the high-roller segment in GENS and in London casinos. Likewise, MPHB saw its prize payout ratio rising by 2.6% in the quarter while BToto registered 4Q12 earnings which slid 19% QoQ as its prize payout ratio also rose 2.5% from the preceding quarter.  

Both casino and NFO sales were higher however.  Total casino revenues in Singapore rose 5% QoQ to USD1.37b vs. the 2% contraction in the Malaysian market to USD427.6m. The market share of Resorts World Sentosa remained at 38% (based on the total casino revenues) with the increase in the total revenues driven by the CNY effect. Nonetheless, RWS has continued to reclaim its market share from  Marina Bay Sands  from 47% to 49% currently based on rolling chip volume. On the other hand, MPHB saw its NFO ticket sales improved by 5% QoQ despite having one draw less in 1Q12,  also due to the CNY effect. However, BToto reported its NFO ticket sales weakened by 2% as it had two lesser draws. As such, BToto’s ticket sales in 1Q12 were only 9% (previously 16%) higher than that of MPHB’s Magnum.  

Expecting a soft 2Q12. Going forward, we expect the earnings for both MPHB and BToto to decline after their restructuring exercises, where NFO business will account for only 75% of MPHB earnings while BToto’s earnings will be diluted by c.20% after its Business Trust listing. However, we expect no surprises for GENT and GENM’s earnings in the near team. All in, 2Q12 earnings are expected to be softer than 1Q’s seasonally strong quarter from the CNY effect.  

OVERWEIGHT maintained. We are now switching our preference to NFO players over casino operators given the former’s restructuring plans. The fallout from its New York plan means GENM may not have any new price/earnings catalysts in 2012 and 2013. That said, the new Echo stake indicates that other Genting companies have already started to look for opportunities in the current difficult time and this will benefit GENT eventually. In summary, we like MPHB for its re-rating story and are choosing it as our TOP PICK in the gaming sector. 

Source: Kenanga