With Malaysia joining other countries in opening its international border last Friday as the country entered the endemic phase of COVID-19, prospects for the Gaming Sector which was hit hard in the past two years, are expected to make a turn for the better for a meaningful recovery in 2022. This is especially so for casino players where the latest 4QCY21 results season saw GENM turning profitable for the first time in the past two years as RWG staged a strong turnaround while its UK and USA units continued to post commendable results. Thus, the international border reopening augurs well for GENM and hence GENTING. Meanwhile, the NFO ticket sales have recovered to pre-MCO 3.0 lockdown levels which are at 80%-85% of pre-COVID levels and we expect a full recovery in 2HCY22. Going forth, enforcement on illegal operators remains the key to ticket sales growth. In all, we maintain our OVERWEIGHT rating for the sector.

Casino: endemic phase is here; recovery is on the way. More countries are in transition to endemic phase, Malaysia and Singapore included from April 1, which allow international tourists in without having to quarantine. This is expected to have positive impact on the casinos around the world under GENTING (OP; TP: RM6.12), GENM (OP; TP: RM3.83) and GENS (Not Rated). In fact, GENM’s UK and USA operations have produced commendable results in the past three quarters after the reopening/relaxation of operating restriction while RWG made a better-than-expected turnaround in 4QFY21 after it reopened from MCO 3.0 lockdown. With the opening of outdoor theme park Resort SkyWorlds in early Feb, which could help to broaden non-gaming revenue at GENM, a recovery to pre-pandemic level is likely to be seen in 1HCY23. In all, GENTING is expected to benefit from the reopening of GENM and GENS and from the new wholly-owned Resort World Las Vegas (RWLV).

NFO: a full recovery of ticket sales is expected in 2HCY22. After a slow start post MCO 3.0 lockdown, NFO ticket sales have recovered swiftly to 80% of pre-COVID levels in Feb from 50%-60% initially in mid-Sep 2021. We believe the worst is over for the NFO operators BJTOTO (OP; TP: RM2.22) and MAGNUM (MP; TP: RM1.95) as new lockdowns are unlikely given that the country has entered the endemic phase from 1 April. As a result, the current ticket sales trend is on track to meeting our expectations of a recovery to 80%-85% level in 1HCY22 before a fully recovery in 2HCY22. As such, this makes its attractive dividend yield, currently at >6%, sustainable. Overall, while 2022 is still impacted negatively by the one-off prosperity tax, 2023 will be the full recovery year in earnings. Going forth, enforcement on illegal operators remain the key to ticket sales growth where the licensed NFO players saw their ticket sales growing substantially in 2HCY19 with strong enforcement on the illegal operators back then.

Expecting a seasonally strong 1QCY22. All gaming stocks reported improved results in 4QCY21 following the reopening from the MCO 3.0 lockdown. In fact, GENM’s 4QFY21 which turned profitable with earnings at RM306.6m beat expectation owing to stronger-than-expected turnaround at RWG, helped by higher VIP volume coupled with favourable luck factor while its UK and USA units also continued to show solid numbers. However, while GENTING’s 4QFY21 results missed expectations owing to disappointing RWS’ earnings, higher share of losses of associate income largely from the Meizhou Wan power plant on rising coal costs. On the other hand, although turning around from loss-making position after business activity resumed, both NFOs namely BJTOTO’s 2QFY22 and MAGNUM’s 4QFY21 reported net profits of RM53.3m and RM20.5m missed estimates, no thanks to slower-than-expected recovery in ticket sales, as mentioned above. Going forth, the upcoming 1QCY22 results are expected to be seasonally strong with the CNY quarter for GENM while NFOs should also see uptick in ticket sales in the CNY led seasonally strong quarter. Overall, as we enter the endemic phase of COVID-19, we expect a meaningful recovery for the industry players in 2022 and a full recovery from 2023 onwards.

Earnings recovery is on the way; OVERWEIGHT maintained. It has been two years since the outbreak of COVID-19 that turned the world upside down with numerous lockdowns with the gaming sector one of the hardest hit sectors especially the casino operators. However, we believe the worst is over as more and more countries enter the endemic phase of COVID-19. As such, we believe that the Gaming sector would be a major beneficiary of recovery theme in 2022. We still prefer GENTING over GENM for its deep valuation as well as it to benefit from the recovery plays on GENM and GENS and the new wholly-owned casino RWLV. For income seekers, NFOs are still the best yielding stocks for sustainable attractive dividend yield of >6% and BJTOTO is our preferred pick. Maintain OVERWEIGHT on the Gaming Sector.

Source: Kenanga Research - 4 Apr 2022