We maintain OVERWEIGHT on the gaming sector, a major beneficiary of the reopening of the economy and international borders, despite the disapointing results reported by all the four gaming companies for 1QCY23. Casino operator GENM (OP; TP: RM3.35) saw weaker-than expected return of foreign tourists to its Resorts World Genting while GENTING (OP; TP: RM5.66) was weighed down by softer-than-expected CPO prices at its plantation unit. Meanwhile, both previously covered NFOs were hit by exceptionally high prize payout ratios but on the positive note, both saw ticket sales returning to 82-92% of pre-pandemic levels. GENTING remains as our sector pick as it is a proxy to the recovery in the tourism activities both in Malaysia and Singapore, backed by the return of Chinese tourists.

Disapointing quarter. All four gaming companies under our coverage disappointed in 1QCY23 as opposed to two outperformers and two underperformers in the preceding quarter. GENTING’s 1QFY23 results missed our forecasts due to weaker-than expected return of foreign tourists to GENM’s Resorts World Genting (RWG) and softer-than-expected CPO prices for GENP (MP; TP: RM5.50). However, earnings recovery for GENS (Not Rated) was on track although non-gaming revenue declined 15% owing to elevated airfares during the festive season which impacted visitor volume. Meanwhile, GENM’s UK & Egypt and North America casino operations continued to post topline revenue growth. 

Both NFO players were hit badly by the luck factor with SPTOTO’s (Not Rated) 3QFY23 estimated prize payout ratio (EPPR) surged sharply to 71.2%, averaging YTD 9MFY23 EPPR to 65.4% against our FY23 assumption of 63% while EPPR for MAGNUM’s (Not Rated) 1QFY23 jumped to 71.8% against our 67% assumption for FY23. However, both NFOs reported strong ticket sales. SPTOTO registered the second highest average ticket sales per draw of RM19.2m for the past three years in 3QFY23, recovering to 92% of pre-pandemic level. MAGNUM recovered to 82% of pre-COVID-19 level at an average of RM14.5m per draw, the highest average ticket sales per draw for the past three years.

Maintain OVERWEIGHT. We expect visitor numbers to integrated resorts of both GENM and GENS to continue to recover throughout 2023, particularly with China’s reopening early this year. In view of this, GENTING remains our top pick over GENM as the former is a proxy to the recovery of tourism activities in both Malaysia and Singapore, and has a more diversified earnings base that includes plantation. On the other hand, we had earlier ceased coverage on SPTOTO and MAGNUM.

Source: Kenanga Research - 14 Jun 2023