RHB Research maintains Neutral on gaming, flags possible sin tax hike

RHB Research maintains Neutral on gaming, flags possible sin tax hike
Business & Markets 2013
Written by Levina Lim of theedgemalaysia.com
Tuesday, 17 September 2013 11:21

KUALA LUMPUR (Sept 17): RHB Research Institute has maintained its Neutral rating on Malaysia’s gaming industry, and flagged a possible increase in the country’s gaming taxes – set to be unveiled in Budget 2014 on Oct 25.

“We reiterate our Neutral recommendation on the gaming sector, with potential earnings downgrades on all three gaming stocks under our coverage, should the widely-speculated gaming tax hike materialize,” the research house said a note Tuesday.

Casino tax was last revised by the Government in 1998, from 22-25% to a flat 25%.

Genting Group

The research institute’s sensitivity analysis indicated that a 1% hike in Malaysia’s casino tax could potentially pare down Genting Malaysia’s (GENM) FY13-15F earnings estimates by 2.4%-2.5%.

This is equivalent to an additional RM45 million-RM55 million in contribution from Genting Highlands’ casino operations to the Government’s tax revenue.

It said Genting’s Singapore gaming operations is currently the group’s largest profit contributor, making up 43.7% of the gaming company’s 1HFY13 consolidated core EBITDA of MYR3.21bn, followed by Malaysia at 36.5%.

The report estimates that a 1% hike in Malaysian casino tax could potentially translate into a 1.0-1.2% downside to the group’s bottomline.

Due to Genting’s more diversified earnings base however, the impact of a casino tax hike is relatively muted, said RHB Research.

Magnum Bhd

Currently, number forecasts operators (NFOs) are subject to a gaming tax and pool betting duties of 8%.

According to RHB Research, a 1% hike in NFO pool betting duty may potentially erode MAG’s FY13-15F net profit by 8.0-9.0% - ceteris paribus.

“Nonetheless, we believe that management is highly likely to lower its prize payout should taxes be lifted in order to mitigate the negative impact on its bottomline,” said RHB in the report

RHB Research pointed out that Magnum was subject to the biggest earnings downside should a revision in NFO-related tax materialise.

“A revision in NFO-related taxes may potentially cause a drop in the Government’s tax collection, unless more initiatives are being implemented to clamp down on illegal NFOs,” it added.

Dividend surprises help mitigate shortfall

On the upside, Genting Malaysia (GENM), Magnum and Genting announced a surprising dividend payout – GENM declared an interim DPS of 4.3 sen (from 3.8 sen in 2QFY13), Magnum announced its first interim DPS of 5.0 sen (from nil in 2QFY12) while Genting declared a special DPS of 50.0 sen, conditional upon the proposed issuance of warrants at a ratio of 1-for-4 at an issue price of RM1.50 per warrant.

Meanwhile, the report cautioned that there is a possibility of further earnings disappointment in 2HCY13 for Genting and GENM due to weaknesses in the former’s Singapore gaming operations, and as the latter’s UK business continues to face headwinds in recovering debt we move into 2H of the year.