"Gaming sector's earnings forecast cut on tax burden"

KUALA LUMPUR: RHB Research has cut its gaming sector's earnings forecasts to account for the increased overall tax burden on the number forecast operators (NFOs).

The investment bank said the service tax hike, from six per cent to eight per ent, in Budget 2024 was an unexpected setback for the gaming industry.

"Currently, we think the ticket sales and dividend recovery have been priced in, and the sector lacks re-rating catalysts to bring earnings and valuations to new heights. "However, despite these challenges, the NFOs are offering dividend yields of seven to eight per cent," it said in a note today.

As such, RHB Research has maintained its "Neutral" stance on the gaming sector.

Meanwhile, the investment bank has also trimmed its financial year 2024 to 2025 (FY24-25) forecast earnings for Magnum Bhd and Sports Toto Bhd by four to five per cent, after factoring in the increased tax rate.

It said this is assuming that they absorb all the incremental cost without increasing the ticket price nor lowering the prize payout.

Additionally, RHB Research also believes that while ticket sales are gradually improving and inching closer to pre-pandemic levels, the current sector valuation, close to its mean is fair and that the market has already priced in the recovery in ticket sales.

"While the NFOs are eagerly awaiting stricter legislation against illegal NFOs and the legalisation of online gaming, we believe such policies are not on the top of the government's list for now.

"As for the ban of outlets in Kedah, we understand that the NFOs players are still in talks with both the federal and state governments in searching for remedies, for example relocation, to the current situation," it added.

Despite the challenges, RHB Research said the recent state elections may improve the dividend outlook for the NFOs, given the reduced uncertainty on outlet closure possibly decreasing the need to retain cash.

The bank noted that while both Sports Toto and Magnum offer seven per cent FY24 forecast yields, its top pick is the latter, given that Sports Toto (through HR Owen) is weighed down by the challenging operating environment in the UK).

RHB Research pointed out that HR Owen's margins might continue to face pressure due to rising energy costs, wages, and borrowing expenses, given the persistently high inflation 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 added.

Moving forward, the bank said key downside risks for the gaming sector include unfavourable luck factor, unfavourable policies, and softer-than-expected ticket sales.

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