Hands tied: A file photo of customers in a Sports Toto outlet. Analysts say NFOs are unlikely to reduce prize payouts for fear of affecting their sales.
PETALING JAYA: The service tax increase disclosed in Budget 2024 is viewed as a setback for the gaming industry, placing an additional tax burden on number forecast operators (NFOs).
RHB Research said this development represents an unforeseen obstacle for the industry and as a result, the research firm has adjusted its earnings estimates for Magnum Bhd
and Sports Toto Bhd (Sports Toto), reducing them by 4%-5% for financial year 2024 (FY24) and FY25.
This adjustment assumes that the operators will absorb all the incremental costs without raising ticket prices or reducing prize payouts.
During the tabling of Budget 2024, Prime Minister Datuk Seri Anwar Ibrahim announced that the government will raise the service tax rate by two percentage points, from 6% to 8%.
Given gaming services fall under the taxable category of the Service Tax Act of 2018, RHB Research said the adjustment essentially represents an additional tax burden for the NFOs.
“The quantum is 1%-2% of gross sales as the net payable service tax is net of gaming tax, pool betting duty and payout. Note that the NFOs have been absorbing these taxes since the implementation of the goods and services tax in 2015 and also the service tax continues to apply to the gaming industry following the widening of scope and re-implementation of sales and service tax in 2018,” the brokerage explained.
However, RHB Research said that decreasing the prize payout may not be an ideal strategy, nor is raising ticket prices, to address the issue as these actions could potentially result in reduced sales and a loss of market share to illegal NFOs.
Moreover, the research house believed that the sector lacks new positive catalysts.
“While ticket sales are gradually improving and inching closer to pre-pandemic levels, we believe the current sector valuation – close to its mean – is fair and that the market has already priced in the recovery in ticket sales,” it said.
Additionally, while NFOs eagerly await stricter legislation against illegal NFO operations and the legalisation of online gaming, the research house believes that such policies are not currently high on the government’s priority list.
Regarding the ban of NFO outlets in Kedah, RHB Research noted that NFO players are in ongoing discussions with both federal and state governments, exploring potential remedies such as relocation to address the current situation.
Commenting on Sports Toto, the research house stated that a bumpy road lies ahead for Sports Toto’s British subsidiary luxury-car distributor HR Owen Plc.
Given the persistent high inflation in Britain, the research house said HR Owen’s margins may continue to face pressure due to rising energy costs, wages, and borrowing expenses.
Additionally, the launch of its Hatfield showroom could lead to increased depreciation and higher interest expenses, potentially impacting HR Owen’s profitability in FY24. However, the research house noted that Sports Toto’s dividends primarily come from its lottery business.
Consequently, the challenges at HR Owen are unlikely to hinder the company’s dividend outlook.
The research house has maintained its “neutral” stance on the NFO sub-sector.
“Despite the challenges, the recent state elections may improve the dividend outlook for the NFOs, given the reduced uncertainty on outlet closures may decrease the need to retain cash,” it said.
While both Sports Toto and Magnum offer 7% FY24 yields, RHB Research has named the latter as its top pick as it is not exposed to the challenging operating environment in Britain, unlike Sports Toto through HR Owen.
However, the research house remains cautious, warning that if Magnum’s higher-than-average prize payout ratio persists, it could pose downside risks to future earnings and dividend payouts.
