KUALA LUMPUR (Sept 8): Despite the gaming sector's lower-than-expected performance in the second quarter this year (2Q22), Kenanga Investment Bank Bhd (Kenanga IB) maintained an “overweight” call on the sector as it is “recovering slowly but surely” towards the second half of 2022 (2H22).

In a sector update report on Thursday (Sept 8), the research house expects visitor arrivals at integrated resorts and number forecast operators’ (NFOs) ticket sales to continue to recover in 2H22 as the pandemic moves towards an end.

“There was a slight sequential deterioration in the recently concluded 2Q22 results season but we do not find this alarming, as we believe the recovery of the gaming sector on the economy reopening is a matter of ‘when’ and not ‘if’,” said Kenanga IB analyst Teh Kian Yeong.

“However, we are mindful of the sustained high inflation that is eating into consumer spending power, potentially hurting visitor arrivals at integrated resorts and ticket sales of NFOs,” he cautioned.

According to the report, Kenanga covers four gaming companies, namely Genting Bhd, Genting Malaysia Bhd (GENM), Magnum Bhd and Sports Toto Bhd.

“Our top picks for the sector are Genting (TP: RM5.86), being a proxy to the recovery in tourism in both Malaysia and Singapore, and Sports Toto (TP: RM2.13) by virtue of its attractive dividend yield of 8% to 9%,” Teh said.

In comparison with GENM, he said Genting is preferred as the Genting has a more diversified earnings base including plantation. Teh had set a TP of RM3.64 for GENM.

“GENM returned to the black as visitor arrivals rose 32% quarter-on-quarter (q-o-q) to 5.4 million in 2Q22 (but still fell short of our expectation) as international borders reopened from April 1.

“Meanwhile, its operations in the UK and Egypt reported flattish performance sequentially, while its North American operations saw earnings growth of 58% q-o-q,” he said.

Nonetheless, he stated that Genting has also faced capped visitor arrivals due to limited availability of flights and exorbitant airfares.

Besides that, he set a TP of RM1.59 for Magnum, stating that the company is less preferred compared with Sports Toto as it offers a less attractive dividend yield of 4% to 6%. Nonetheless, he pointed out that both companies have their own unique dampener in their 2Q22 results.

“The recovery of ticket sales of NFOs were uneven with Sports Toto returning to 82% of pre-pandemic levels, while Magnum trailed at only 71%.

“Each of them also has its own unique dampener in their results. Sports Toto UK-based luxury car distributor HR Owen reported disappointing earnings while Magnum was hit by abnormally high prize payout ratio of close to 70% versus the theoretical 67%,” Teh explained.

He rated all the stocks under Kenanga’s coverage as “outperform”, having an expected total return of more than 10%, except Magnum as “market perform”, with an expected total return within the range of -5% to 10%.

At market close, Magnum was one sen lower at RM1.62; Sports Toto gained two sen to RM1.87; while GENM rose one sen to RM2.98 and Genting was unchanged at RM4.55.