PETALING JAYA: TA Research expects the gaming sector could stay below the tax radar in Budget 2024 as the government has set its sights on new taxes, such as the capital gains tax to broaden its tax collections for the upcoming budget.
Previously, the Pakatan Harapan-led government raised casino duties to 35% and reduced the number of four-digit special draws by half in Budget 2019, after the 14th General Election in 2018.
“However, we believe the situation is different this time around for the government to consider another post-election tax-hike as the gaming sector has suffered badly during the Covid-19 period and is in the midst of recovering.
“An increase would be considered inappropriate, which would derail the earnings recovery process,” said TA Research in a note to clients yesterday.
Budget 2019 sprang negative surprises that affected the profitability of casino and number forecast operators (NFOs) in Malaysia, as it included a hike in casino duties on gross collection, a steep rise in the casino licence fee by an additional RM30mil to RM150mil a year, machine dealer’s licence increased from RM10,000 to RM50,000 a year, gaming machine duties increased from 20% to 30% on gross collection, and the number of special draws being reduced by half.
Budget 2020, meanwhile, was positive for the sector as the government introduced stern penalties to curb illegal gambling, which included a higher minimum mandatory penalty of RM100,000 for illegal gamblers along with a minimum mandatory jail sentence of six months.
Budget 2021 saw no hike in gaming taxes as the gaming sector bore the brunt of Covid-19 lockdowns while Budget 2022 prepared Malaysia to transition to the endemic phase.
As for Budget 2023, a tax incentive was announced in the form of reinvestment allowance of 60% on qualifying capital expenditure for a period of five years consecutively and to be off-set against 70% of statutory income.
TA Research said, “All in all, we believe Budget 2024 will likely be a non-event for the gaming sector.”
It maintained its “overweight” stance on the gaming sector with a bet on no gaming tax hike in Budget 2024.
The research house also upgraded Genting Malaysia Bhd to a “buy” call with a target price (TP) of RM2.71 as the current valuation offers superior returns compared with its peers, in terms of dividend yield and financial year 2024 (FY24) price earnings multiple.
TA Research’s top pick in Genting Bhd with a TP of RM5.35 as “we like the company’s diversified business model and cheap valuation compared to its global peers”.
In a worst-case scenario, the research house said in its sensitivity analysis, every one percentage point increase in gaming tax would lead to 4.6% and 2.6% decline in Genting Malaysia and Genting’s FY24 profit respectively.
Meanwhile, Sports Toto Bhd’s earnings could decline by roughly 7.5% for every one percentage point increase in gaming tax, without adjustments made to prize payouts.
“However, we reiterate our view that this is an unlikely scenario as the hike would derail the earnings recovery process,” the research house said.