Gaming - Better luck next time!

NFOs will remain the near term play in the sector for their corporate restructuring catalysts in 2013. As for casino players, there have little price and earnings catalysts at the moment and hence are only for longer term bets on new markets opening up in the region soon. Given that they are  politically sensitive, gaming stocks on the overall may face challenges in the 2013 election year. However, MPHB should stand tall in 1H13 as its demerger exercise will be completed then. While we like the company’s gaming products, we believe that the listing of STM Trust will de-rate BJTOTO lower. Meanwhile, GENM is preferred  for its resilient home turf casino operations while the weaker outlooks for GENS and plantations will put GENTING’s earnings at risk. In summary, we are maintaining the sector rating at NEUTRAL with MPHB being our TOP PICK.  

3QCY12 results in line.  All the four gaming stocks reported earnings which  were within market expectations in the recent reporting season. While Genting Bhd (“GENTING”, MP; TP: RM9.59)  and Multi-purpose Holdings Bhd’s (“MPHB”, OP; TP: RM4.31) earnings came in within our expectations, Genting Malaysia Bhd (“GENM”, OP; TP: RM4.19)  and Berjaya Sports Toto Bhd (“BJTOTO”, UP; TP: RM3.88) beat our estimates by 8% and 6% respectively. Lady luck pushed BJTOTO’s earnings higher while GENM benefited from a lowerthan-expected taxation charge. Although Genting Singapore Plc (“GENS”, NOT RATED) and its plantation unit reported a poorer set of results earlier, we were surprised that the parent company GENTING still managed to register 3Q12 results that met expectations. This was largely attributable to the stronger-than-expected earnings at GENM. 

Better luck for NFO but not casino. Both the Malaysian and Singaporean casinos reported weaker top lines QoQ in 3Q12 due to poorer luck and a lower business volume. The 3Q12 rolling chip win for RWS fell to 2.8%, the second lowest since the casino’s inception in Feb 2010, from 3.1% in 2Q12. The market share for rolling chip volume also dropped to 47% in 3Q12 from 48% previously. In fact, the casino revenue for GENS hit a new low, putting the casino revenues of both RWG and RWS closer to it. Elsewhere, Genting UK turned into a loss at EBITDA level after an impressive 2Q12 as poor luck  factors hit hard at its London casinos together with an overall lower business volume. In New York, RWNYC’s operation remained strong with its revenue sliding slightly only by 1% while the bottom line inched up 1% as net win gained 4% over the quarter. Meanwhile, MPHB saw improved luck in 3Q12 as its estimated prize payout ratio (EPPR) dipped slightly to 67.3% from 68.9% in 2Q12, although this was still way higher than that of the 62.7% in 3Q11. BJTOTO also experienced better luck as its 2Q13 EPPR fell to 57.5% from 59.9% in 1Q13 and 57.9% last year. 

NFO remains the focus in the near term. With their corporate exercises coming to an end at both MPHB and BJTOTO, NFO players will continue to outshine the casino operators. While MPHB is expected to be rerated for being a pure gaming stock post its demerger exercise, BJTOTO is likely to face a de-rating given its EPS and dividend dilutions after the listing of STM Trust in Singapore. We still believe that the NFO players will get their usual 20 Special Draws in 2013 but there should more special draws expected towards the year-end rather than the earlier part of the year given the potential added  “sensitivity” from the General Election in 1H13.

Hopeful on the new casino markets. The casino segment is a longer term play with new markets opening up such as in countries in North Asia and certain states in the US. Either way, GENTING will be the ultimate beneficiary should GENM or GENS clinch any new licenses, with it having the financial strength to stomach the expansion with its RM18.0b cash in hand. With RWS now fully completed, the group has no major capex in 2013, allowing it to scout for new opportunities. Meanwhile, the mass market remains the major contributor, we notice that the Malaysian high-roller market share has expanded over the years to the now high-thirties from the mid-twenties 2-3 years ago. This may increase GENM’s earnings volatility in the future.  

Staying NEUTRAL. Our preference is still with NFO players over the casino operators given the boost from the former’s restructuring exercises. In addition, there are little price and earnings catalysts for GENT and GENM that we can see at the moment. All in, our rating for the sector is maintained at NEUTRAL and MPHB remains as our Top Pick in the sector for its rerating story. For casino plays, we prefer GENM over GENTING. BJTOTO meanwhile continues to remain our UNDERPERFORM call, contrary to the consensus view.

Source: Kenanga