TA Securities does not expect a V-shaped recovery for the gaming sector in the second half of 2020 (2H20), citing the likelihood of slow recoveries following the Covid-19 pandemic despite the lifting of operational and travelling restrictions.
“Judging from the situation in Macau, where all casinos were ordered to close for 15 days in February, the recovery in gaming volume after reopening remained at a snail’s pace since March,” said TA Securities analyst Tan Kam Meng.
As it stands, casino stocks had taken a tumble in response to the temporary closure, with number forecast operators not spared from this as well.
“1Q20 sector earnings were below expectation due to weaker-than-expected Genting Malaysia Bhd’s earnings, which spilled over to Genting Bhd. Meanwhile, the decline in Berjaya Sports Toto Bhd’s 1Q20 earnings was largely within our expectation,” said Tan.
“Overall, 1Q20 sector earnings before tax declined by 40% year-on-year (y-o-y) on the back of a 22.6% y-o-y decline in revenue.”
However, Tan believes that a major game changer for the sector is the Covid-19 vaccine, in spite of the high earnings risk for 2H20.
Tan believes a success story of the Covid-19 vaccine will help to revitalise investor confidence, which will bode well for stock valuation, especially for those badly hit by the pandemic, which includes gaming counters.
At the same time, it would spur consumer confidence in social gatherings and to visit crowded places like casinos, theme parks and exhibitions. A vaccine is also likely to trigger the removal of border control, which would help to encourage mass travelling.
“In other words, the availability of vaccines in the near future will improve sentiment greatly and bring the affected companies back to life,” said Tan.
Looking forward, Tan believes that gaming companies are still in the healing process after reopening, and any negative budgetary policies would be adding fuel to the fire, while potentially triggering additional layoffs. As it stands, Genting Malaysia has already laid off 3,000 workers to reduce operating costs.
“As such, we believe Budget 2021 will likely be a non-event for the gaming sector this year,” said Tan.
TA Securities maintains an overweight call on the sector, with top picks remaining Genting with a buy call and a target price of RM5.88, and Berjaya Sports Toto with a buy call and a target price of RM2.67.
Genting Malaysia is liked for its solid long-term fundamentals, as well as being a Malaysian proxy to the Japanese casino industry, especially if subsidiary Genting Singapore is awarded a Japanese casino licence.
Berjaya Sports Toto is the dividend play, as it has a generous dividend yield of more than 6%.
“This is very attractive especially in this low interest rate environment,” said Tan. – July 9, 2020
