MALAYSIA’S border re-opening effective April 1 with the potential dismantling of contact tracing requirement should fully restore revenue growth of the number forecast operator (NFO) subsector to pre-pandemic levels.
UOB Kay Hian Research expects the NFO industry (a subsector of the gaming industry) to progressively recover to its pre-pandemic earnings level, given that Malaysia’s travel and leisure sector has shown clear signs that mobility behaviour of Malaysians has graduated into the endemic stage.
“The recent full international borders re-opening on April 1 and the Government’s urgent efforts to recruit foreign workers will further reinforce the NFOs’ recovery led by both local patronage and foreign workers,” projected head of research Vincent Khoo in a gaming sector update.
“The potential dismantling of MySejahtera contact tracing requirements as mooted by the Health Minister will final provide a final lift to revenues to back to pre-pandemic levels.”
Against such backdrop, UOB Kay Hian expects both Berjaya Sports Toto Bhd (BST) and Magnum Bhd to swiftly attain more than 90% of their pre-pandemic revenue from 2Q 2022 onwards.
To recall, ticket sales fell short of the pre-movement control order (MCO) period in the past two quarters after economy re-opening with revenue from the classic games in 3Q 2021-4Q 2021 draws still estimated to be 20%-25% below that of the pre-MCO levels.
“This was mainly attributed to punters’ reluctance to comply with stringent standard operating procedures (SOPs) and lower interest to purchase lottery tickets after prolonged lockdowns,” justified the research house.
“Nevertheless, our channel checks revealed that the betting volume and ticket sales have largely improved to 85%-90% of pre-MCO levels due to punters’ progressive adaptation of the SOPs and spectacular jackpot run (particularly for BST).”
At the moment, UOB Kay Hian is of the view that depressed share prices create “buy” opportunities for BST’s and Magnum whose share prices are still 32% and 37% below their pre-pandemic peaks in 2019 respectively.
“Valuations have yet to reflect the sector’s recent earnings recoveries and restoration of dividends,” noted the research house.
“NFO players offer sustainable prospective yields of 7.5%-7.9% from FY2023 onwards, backed by earnings resilience and stable pay-out ratio of 80%-90%. This should satisfy investors’ hunger for sustainable high-yield plays in a low interest rate environment and volatile capital market.”
All-in-all, UOB Kay Hian reiterated its “overweight” outlook on both the gaming sector and NFO subsector.
“Investors will soon focus on the NFO subsector’s sustainable prospective dividends yields of >7.5%,” projected the research house. “We prefer Magnum for its pure exposure to the segment with a longer-term potential catalyst of U-Mobile monetisation.” – April 4, 2022
