By Xavier Kong
UOB Kay Hian expects local gaming companies to outperform in 2016. This follows the punishing performance the sector had seen in 2015, as investors focus on the Genting group’s earnings turnaround and value creation non-gaming investments, as well as the number forecast operator (NFO) subsector’s high dividend yield.
Maintaining their “overweight” rating on the gaming sector, UOBKH expects Malaysian stocks to at least partially reverse 2015’s vastly disappointing performance, which had seen Genting Bhd, Berjaya Sports Toto Bhd, and Magnum Bhd shares falling between 2% to 17% in 2015 due to weak results.
“While both subsectors bore the full brunt of absorbing the cost of the goods and services tax implemented in Apr 2015, the gaming subsector additionally suffered from the fallout of the VIP gaming market, and the NFO subsector lost market share to illegal operators. Particularly, Genting’s share price has fallen 28% over a two-year period,” noted UOBKH.
However, despite the 28% drop in share price for Genting, UOBKH expects the group’s earnings for its VIP segment to recover, considering 2015 was a “peculiar year”, with the group’s Ebitda derived from VIP operations in Singapore and the UK impacted by falling gaming volumes, low win percentages, and, in Singapore, exceptionally high provision for receivables due to a more liberal credit extension practice before 2015.
“We expect VIP Ebitda to improve for these markets, reflecting normalisation of win percentages and cost rationalisation and, additionally for Singapore, normalisation of provisions by second half 2016 (2H16),” noted UOBKH, adding that Malaysian operations continued to be robust.
The research house had also noted that Genting’s non-gaming investments will serve as important catalysts, with Genting Malaysia Bhd (GenM) to benefit from the rollout of the Genting International Transformation Plan (GITP) programme from 2H16 onwards, which would then culminate in the opening of the world’s first 20th Century Fox theme park, expected to launch in 2017.
“GITP, which entails significant capacity expansion of gaming facilities, is seen as a catalyst in driving up visitorship to the highlands. Apart from indirectly benefiting from GITP, Genting’s investment in pharmaceutical company, TauRX, has received attention following media reports that the company is eyeing a Nasdaq IPO with a valuation of about US$15 billion (RM65.88 billion) in 2017,” noted UOBKH.
“We expect Genting’s and GenM’s Ebitda to recover 16% and 19% year-on-year in 2016, to RM6 billion and RM2.4 billion respectively. The key earnings driver for the Genting group would be lower impairment and operational costs, and normalisation of luck factor for VIP businesses outside of Malaysia, namely in Singapore and the UK,” said UOBKH, noting that Genting’s 2015 earnings took a heavy hit from the shortfall in earnings from Genting Singapore (GenS).
The research house estimates that GenS’ core 2015 Ebitda would fall by 23% to S$892 million (RM2.7 trillion), with a significant portion of the shortfall attributed to at least 40% lower rolling chip volume from the VIP segment, poorer luck factor, as well as between S$30 million to S$40 million rise in impairments of receivables.
On the subject of TauRX, the research house believes that the potential value of the US$15 billion initial public offering possibility of the pharmaceutical company cannot be ascertained as it is still too early, with information on valuation derivation still unavailable. The research house also quoted the TauRX spokesperson, who had noted that the initial public offering on Nasdaq remains in the stage of exploratory discussions, with no decision to be made until the results of the company’s Alzheimer’s drug trials were available.
In the meantime, GenM had reported record levels in casino revenue at Genting Highlands for the group’s fourth quarter 2015 (4Q15), driven by the growing revenue from slot machines and electronic gaming tables. Genting Highlands had managed impressive 3Q15 results with an Ebitda of RM521 million, the group’s best since 1Q14.
Management had attributed the good 3Q15 results to an impressive mass gross gaming revenue growth of more than 10%, along with better margins, to the lower cost incurred in the VIP segment, where the group had avoided overlapping product offerings to players through effective data mining and revisions in the points reward for their loyalty programme, as well as a lower payroll.
Towards the NFO subsector, UOBKH notes that the outlook for 1H16 remains challenging, due to the general weakness in consumer spending. However, revenue trends have stabilised, and NFOs are still offering decent yields of about 6.5%, which are appealing amid market volatility.
UOBKH maintains their top pick as Genting, with a higher target price of RM10.78 from RM10.58, due to the 20.7% stake the group has in TauRX, as well as the point that Genting is one of the cheapest large-scale casino operators, with the appeal of a deep value stock.
At the same time, UOBKH also noted GenM as another favourite, which should steadily re-rate in 2016 following the progressive opening of GITP facilities in 2H16 and 2017.
Berjaya Sports Toto is also rated as a “buy” for UOBKH, with a target price of RM3.26, which, along with the NFO’s dividend yield of between 6.6% to 7% in FY16 to FY17, provides decent total returns of between 15% to 16%, according to the research house.
You must be logged in to post a comment.