Gaming sector’s earnings expected to remain strong in 2010


KUCHING: The gaming sector is expected to remain robust next year as earnings from both the casino and number forecast operators (NFO) segments are forecasted to be resilient even during challenging economic and external conditions.

OSK Research Sdn Bhd (OSK Research) in its investment strategy for 2010 highlighted that casino operator Genting Bhd’s (Genting) earnings have stayed strong despite the economic downturn.

However, its peers may have reported a sharp decline in earnings on declining visitor arrivals, impairment losses and lower average spending per head.

At the same time, Genting Malaysia Bhd (Genting Malaysia) continued to register relatively strong core revenue growth in excess of 11 per cent year-on-year (YoY) largely contributed from good yield management and high single digit casino partronage growth rates.

The research firm was optimistic that even if Genting is facing competition from two new casinos in Singapore, its core domestic gaming earnings stability and resilience would continue to be supported by a significant lower price point product offering, its monopoly status and stable domestic-driven day tripper casino earnings profile.

On another front, number forecast operator (NFO) Magnum Bhd was recently awarded a new 4D game with a jackpot element.

OSK Research noted that the move will certainly help to erode the market share of illegal operators estimated at 1 to 1.5 times the share of the legal NFO market, which was valued at about RM8 billion as at end of 2008.

Meanwhile, illegal operators were unable to offer jackpots where th roll over sum was typically too high for an illegal operators to match.

The research firm observed that given Magnum has the single largest market share in the 4D game, which is known to be the most popular in the illegal NFO market, it expects the new 4D game to boost Magnum’s revenue growth.

Significantly, OSK Research believed the new 4D jackpot game, combined with Berjaya Toto Bhd’s (Berjaya Toto) well known non-4D jackpot games will increase the awareness of the jackpot market and contribute to revenue growth of the legal gaming industry.

As a result, this will benefit both Magnum and Berjaya Toto while Tanjong Plc (Tanjong) without the benefit of a jackpot game may experience fierce competition.

Further, the government has always remained firm on the move to raise gaming taxes as it would only encouraged illegal operators to gain market share at the expense of the legal ones.

For instance, offering a jackpot element on the 4D game was a signal that the Government remained serious in plugging the leakages due to illegal operators.

The gaming and corporate taxes are estimated to amount to more than RM1.5 billion annually.

OSK Research also noted that the award of 12 special draws, game variations and new games for Berjaya Toto (6/55 game) and Magnum (4D jackpot game) has sent a signal that the Government continued to exercise a pragmatic strategy in attempting to combat illegal NFO operations.

Typically, the research firm observed that Genting and Genting Malaysia’s current valuations of 16.8 times and 13.5 times financial year 2009 price earnings ratio (PER) respectively, were attractive as compared with regional large scale casino average PER of 18 times.

It projected that Genting could attract near term interest as it remains a significant cheaper proxy to Genting Singapore’s (GSP) growth story while sentiment will continue to be surrounded by the anticipated early opening of Resorts World at Sentosa.

OSK Research viewed that Genting Malaysia was the most undervalued large scale casino in the region, which prompted the research firm to raise its “buy” recommendation on its share price with a target of RM3.25 per share.

On the other hand, the research firm favoured Tanjong for its undemanding valuation and attractive dividend yield while Berjaya Toto remains a defensive high dividend yielding stock.