The hike of service tax disclosed in Budget 2024 is expected to be a setback the gaming industry including number forecast operators (NFOs) such as Magnum Berhad (Magnum).
Prime Minister Datuk Seri Anwar Ibrahim had during the tabling of the budget on Oct 13 said that the government will raise the service tax from 6 to 8% from 1 March 2024 onwards.
In its Research note today (Oct 19), Maybank Investment Bank (Maybank) IB Research says one of the tax that Magnum pays is service tax that it bears from gamblers.
“For NFOs, the service tax is currently calculated as (gross sales minus gaming tax minus prize payout) multiply 6/106. Thus, the increase in service tax rate by 2ppts is effectively a “gaming tax” hike for Magnum.
Maybank IB says this development caused it to trim its FY24E/FY25E earnings estimates by only 4% to 5% for the financial year 2024 (FY24) and FY25.
“Moreover, there is reason for us to believe that there will be more enforcement actions against illegal NFOs. Other catalyst is higher-than-expected gross NFO sales/draw/outlet recalling that 2Q23 gross NFO sales/draw/outlet was 10ppts higher than we expected,” Maybank IB said.
It maintains BUY call with a lower DCF-TP of RM1.19 from RM1.25, which is reduction of 5%.
This adjustment assumes that the operators will absorb all the incremental costs without raising ticket prices or reducing prize payouts.
“Thus, the impact to MAG from the service tax hike is, while noticeable, minimal by our estimation. Moreover, we estimate that should NFOs cut the number of 4D Small Consolation Prizes that pays MYR60 per MYR1 bet to 9 from 10, the negative impact of the tax hike would have been neutralized.”
Maybank IB says that based on the recall that its earning estimates are based on gross NFO sales/draw/outlet stabilising at 75% of FY19A levels while 2Q23A gross NFO sales/draw/outlet came in at 85% of FY19A levels (link).
“Thus, there is upside potential to our earnings estimates should 3Q23 gross NFO sales/draw/outlet remain high.
“Moreover, the Prime Minister’s statement that more enforcement actions will be taken against alcoholic drinks smugglers implies the same will be done against illegal NFOs as well,” it said.
