Malaysia’s gaming industry is expected to report weaker earnings this year as the country’s first ever Goods and Services Tax comes into effect from April 1st, crimping revenue at a time of weakening consumer sentiment.
The tax has been under consideration by the government for close to a decade and was finally confirmed last October by Prime Minister cum Finance Minister Najib Abdul Razak. The rate was set at six percent.
Berjaya Sports Toto and Magnum -- two numbers forecast operators (NFOs) listed on the Malaysian stock exchange -- are facing the prospect of lower revenue as well as lower margins this year, analysts said.
"The GST will have the dual effect of both forcing gamblers to reduce their bet sizes as well as serving as an additional tax to the operators, cutting earnings by an estimated 10 percent altogether," said Maybank Investment Bank in a report.
Magnum earlier this month gave its own warning that the tax was likely to have a moderating effect on sales. “With the implementation of the Goods and Services Tax on April 1, 2015 and the higher costs of living from the government's ongoing subsidies rationalisation programme, consumer spending is expected to continue to be weak,” it said. “The GST expense based on net gaming supplies – that will be absorbed by the company – will have an impact on our profitability for the coming financial year,” it said.
NFOs pay an 8-percent gaming tax on total ticket sales and an 8-percent pool betting duty on net revenue.
The NFOs had already reported weaker revenue even before the GST, as rising fuel prices and higher electricity tariff rates lead to smaller bet sizes. Last year started with a 15 percent electricity tariff hike on January 1, followed by the 20 sen per litre fuel price hike on Oct 2, 2014.
Magnum’s 2014 revenue slipped to RM2.88 billion from RM2.99 billion the previous year. In, the nine months to end January, Sports Toto saw revenue decline 4.3 percent year-on-year.
Analysts estimate gross gambling revenue from NFOs last year at about RM10 billion, with Genting BhD, the only casino operator generating about RM6 billion.
"NFOs would continue to see tougher roads ahead...With GST looming, operators have expected sales to soften further to the tune of roughly two percent this year," said Maybank, citing sources from three NFOs.
Adding to the headwind is pressure from other illegal operators, which have cut into the market share of Magnum and Berjaya Sports Toto.
"Channel checks reveal that in the north of Peninsular Malaysia, illegal operators are operating from rented premises in small towns and in the south of the peninsular, they are conducting sales with handheld terminals. We understand their prize payouts are 10-20 percent higher than that offered by legal operators," said Maybank.
According to market observers, NFOs are expected to bear the brunt of the new consumption tax as some moves that had been considered to moderate the impact of the GST have been abandoned.
One proposal had been to reduce the number of class 4D special and consolidation prizes from 10 each to nine each, which would have reduced the theoretical prize payout ratio by about 190 basis points.
Classic 4D accounts for some 70 percent and 85 percent of Berjaya Sports Toto and Magnum sales respectively.
However, the idea was killed following opposition from two of the three NFOs amid concern it may allow illegal operators to gain more market share, said one analyst.
Had the move been implemented, Berjaya Sports Toto and Magnum would have seen their earnings before interest, tax, depreciation and amortisation (Ebitda) margins improve sufficiently to negate the impact of the GST, the analyst added.
AllianceDBS in February pegged the Malaysian gaming sector as being sluggish for the foreseeable future on weaker consumer sentiment and the looming GST threat.
"We remain convinced there is little scope for Malaysian gaming stocks to re-rate in the near term," said the research house, adding that the extended weak domestic consumer sentiment could further reduce discretionary spending, which could in turn have a negative impact on Genting Malaysia's domestic leisure and hospitality operations, as well as NFO ticket sales.
It warned that both Genting and NFOs would have to fully absorb the GST.
However, "the impact will be less severe as previously feared because the computation would take into account prize payouts," it said.
For Genting, in Q4 gaming revenue fell 9.3 percent year-on-year on a 15 percent yoy drop in rolling chip volume amid slow Chinese VIP arrivals.
AffinHwang Capital analyst Lim Tee Yang expects Genting's weak VIP performance last year to drag into 2015.
"Genting has expected the outlook for the VIP segment to remain challenging, which is unsurprising as the Macau gaming industry experienced its eighth consecutive decline in January," he said.
"Challenges in Genting and the potential GST impact suggest that the Malaysia's sole casino operator lacks a catalyst,” he said.
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