Gaming sector outperforms overall market in second quarter
KUCHING: For the past three months, the gaming sector has managed to outperform the overall market – a feat that has not been seen for years.
This is especially exciting news for number forecasting players as they have consistently underperformed the market for the past five years and now are instead posting a strong share price rally between 12 to 14 per cent against FBMKLCI’s minus 8.31 per cent in 2Q18.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the share prices of Berjaya Sports Toto Bhd (Toto) and Magnum Bhd (Magnum) has rallied strongly after the change of government last month, which saw their share prices rising by 12.39 and 14.21 per cent respectively in 2Q18.
“This was on the back of the removal of the GST to be replaced by SST in September as the tax holiday from June to August should see an earnings uptick as players no longer need to absorb the six per cent GST,” said the research arm.
It is still unclear whether industry players including casino players will be charged with the reintroduced SST.
“Meanwh i l e, the new government has mentioned that it will review the previous regime’s IBR tax penalty to company, this has somewhat provided relief to Magnum, which was slammed with RM476 million tax penalty, which has been an overhanging issue for months,” added the research arm.
Operations wise, both NFO players have had stable ticket sales for more than a year and managed to finally register their first ticket sales growth in a while – indicating that the ticket sales downtrend has finally bottomed out.
Both NFO player saw their average ticket sales per draw register a year over year (y-oy) growth for the first time in 6 years.
However, that being said, Toto’s earnings were hit by poorer luck factor in the recent quarter and came above its theoretical payout level of 60 per cent while Magnum managed to report stable luck factor which was at its theoretical level of 66 per cent in the past year.
Looking forward for the NFO segment, 2QCY18 results should be a weaker sequential quarter after a strong CNY-led 1QCY18 for the players which should see declining business volume
“Nonetheless, the zero-rated GST should partly mitigate the downsides. All told, luck factor remains the key determining factor to their bottom lines,” Kennaga Research said.
On the other hand, Kenanga research guides that they continue to believe that 2018 will be an exciting year for the casino operators as the Genting Integrated Tourism Program (GITP) expansion story is close to bearing fruits for Genting Malaysia Bhd (Genting) through the recovery of rolling chip volume across the causeway.
In addition, the impending legalising of casinos in Japan should boost sentiment for both Genting Singapore plc and Genting based on past experience in the Singapore back in 2006.
Recall that the Japanese Diet’s lower house has on June 19 passed the Integrated Resorts Bill to allow casino gambling in the country.
Under the bill, visitors will have to pay an JPY6,000 admission fee for each visit and are only allowed to visit integrated resorts three visits per week with a capo of a maximum of 10 visits per month.
Overall, Kenanga Research is maintaining their ‘overweight’ call on the gaming sector and continues to prefer the casino sub-segment due to the GITP and Japan market catalysts and reiterates that their preferred sector pick is still Genting with a call of ‘outperform’ and a target price of RM10.85.
That being said, the research arm still believed the two NFO stocks were still attractive picks as they offer above average dividend yields of 6 to 7 per cent which is good for income-seeking investors.