The gaming industry is now dealing with a higher tax burden following the announcement that service tax in the nation is set to increase.
At the Budget 2024 presentation, Prime Minister Datuk Seri Anwar Ibrahim suggested that the government increase the service tax rate by two percentage points to 8%.
As the net payable service tax is net of gaming tax, pool betting duty, and payout, RHB Research estimates that the rise for the gaming sector will amount to 1-2% of gross sales.
Since the introduction of the Goods and Services Tax (GST) in 2015, numbers forecast operators (NFO) have been responsible for paying these taxes, and the gaming industry is now subject to the service tax following the expansion of the SST’s application and re-implementation in 2018.
According to RHB, any cut in prize payout or rise in ticket pricing to make up for the tax hike could result in lower sales and a loss of market share to unlicensed NFOs.
“After factoring in the increased tax rate, we trim our FY24F-25F earnings for Magnum Bhd and Sports Toto Bhd by 4-5%, assuming that they absorb all the incremental cost without increasing the ticket price nor lowering the prize payout,” it stated in a sector report.
The research company also made note of the lack of fresh positive catalysts for the industry because it considers the sector valuation, which is reasonable and close to its mean, to have already taken the rebound in ticket sales into account.
Additionally, it stated that for the time being, the government’s policy goal does not prioritise legalising online gaming or enacting stronger regulations against unlawful NFPOs.
Since there is less uncertainty about outlet closures, RHB maintains its “neutral” stance on the NFO sub-sector. This could boost the dividend outlook for the NFOs.
While Sports Toto and Magnum both offer 7% FY24F yields, we recommend Magnum above Sports Toto (via HR Owen) because it is less vulnerable to the adverse operating climate in the UK.
“However, we caution that if Magnum’s higher-than-average prize payout ratio continues, it poses downside risks to future earnings and dividend payouts,” it continued.
HR Owen, Sports Toto’s luxury car division, could continue to be under pressure because of rising energy prices, wage costs, and loan costs, according to RHB.
It is anticipated to have an impact on FY24F (June) and may have an impact on HR Owen’s profitability as the opening of Hatfield showroom may result in greater depreciation and interest costs.
“Having said that, Sports Toto’s lottery operation is where it gets the majority of its dividends. As a result, the difficulties at HR Owen are unlikely to adversely affect the company’s dividend prospects,” it added.
