Gaming sector takes hits

Source: Star Biz

Not only is there no sports betting licence, NFOs also slapped with duty hike

PETALING JAYA: There is never a dull moment in the gaming sector over the past couple of weeks. Within that period, the Government has decided to abort sports betting while number forecast operators (NFOs) were served with a letter informing them that the pool betting duty has been increased.

To recap, the Government announced that no sports betting licence would be issued owing to a public outcry.

Berjaya Corp Bhd (BCorp) had earlier announced that it had entered a sales and purchase agreement to buy 70% stake in Ascot Sports Sdn Bhd, which is jointly owned by Tan Sri Vincent Tan and his son, Datuk Robin Tan. The Government, however, later said that it had yet to award the licence.

Subsequently, BCorp has aborted its proposed acquisition of a 70% stake in Ascot Sports from Tan after the Government decided not to re-issue the sports betting licence to Ascot.

BCorp shares reacted immediately and fell to an almost five-month low after it confirmed that its sports betting deal was off.

In an unprecedented move, the Government surprised the NFOs with a tax hike last week following its decision not to issue the sports betting licence.

According to filings with Bursa Malaysia, Berjaya Sports Toto Bhd (BToto), Tanjong Plc, Multi-Purpose Holdings Bhd (MPHB), Olympia Industries Bhd and Berjaya Assets Bhd received a letter from the Finance Ministry informing them that effective June 1, the pool betting duty has been increased to 8% of net revenue (gross revenues less 8% gaming tax) from 6% previously.

Most NFOs had issued statements on Bursa Malaysia saying that they would not be significantly affected by the tax hike.

MPHB, which operates Magnum, said the group’s performance would not be materially affected by the increase in pool betting duty while Tanjong, which operates Pan Malaysian Pools Sdn Bhd, said the revision was not expected to have any material impact on its results.

Berjaya Assets, which owns 65% of Natural Avenue Sdn Bhd, said the new betting duty was not expected to have any material impact on the group’s results for the financial year ended June 30.

On the other hand, Olympia whose subsidiary Lotteries Corp Sdn Bhd is a NFO in Sabah said the increase was expected to have an adverse financial impact on the operating performance of the group for the financial year ending June 30, 2011.

According to analysts, the demand for gaming was unlikely to be significantly affected by the recent Government’s move to increase betting duty but the effect was more on individual companies having to deal with higher taxes.

Industry sources said three NFO operators (BToto, Magnum and Tanjong) would lobby the Finance Ministry to reduce the 4D first prize payout by RM200 to RM2,300 (4D Big) and RM3,300 (4D Small).

“We do not discount the possibility of more tax or duty increases in the 2011 budget in October,” ECM Libra Investment Research said. It has downgraded the gaming sector to underweight from neutral.

The last time the pool betting duty saw an increase was in November 1998 at the height of the Asian financial crisis (from 7% to 10%). In December 2002, it was decreased to 6%.

ECM Libra said one option for NFOs to preserve their margins was to lower their prize payout ratios.

“In April 1999, the NFOs reduced the first prize on 4D Big and 4D Small by RM200 each to RM2,000 and RM3,000 respectively, in response to the November 1998 pool betting duty increase,” it said.

It said the alternative was to absorb the increase and suffer margin compression in order to maintain revenue growth.

“Of the two companies with NFO businesses under our coverage, Tanjong is the least affected as only 20% of earnings are derived from the NFO business,” ECM Libra said, adding that BToto would be more badly hit.

CIMB Research said a 2% tax increase on an estimated legal market of RM8.5bil would add some RM160mil in tax. The research house said the Government appeared to be signalling that the sin sectors – and gaming in particular – could be in for a round of unfavourable reforms.

Kenanga Research viewed the hike as negative as the man in the street was not expecting any such measures especially when the trend was seemingly for liberalisation with football betting being allowed initially. It agrees with ECM Libra that the impact (of pool betting duty hike) would be felt mostly by pure gaming operators such as BToto.

The research house said a possible RM200mil would be added to government coffers from this exercise.

Should the payout be reduced as a corollary, topline growth could slow as punters switch their preference towards the illegals, it added.

CIMB said the spotlight may later turn to the country’s sole casino operator Genting Malaysia Bhd, whose 25% gaming tax rate had been unchanged since 1999.

However, an analyst said Genting seems to have hedged its position as a regional casino player well.

While the hike has no impact on Genting, the casino operator may have irked some investors with yet another related-party transaction on its plan to acquire the group’s gaming operations in Britain (Genting UK) from Genting Singapore Plc for £340mil, which analysts said was at the higher end of peers’ valuation.

Previously, Genting Malaysia (then known as Resorts World Bhd) has paid Genting group chairman Tan Sri Lim Kok Thay US$69mil for a 10% stake in US gaming patent company Walker Digital Gaming.

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See also the ECMLibra analyst summary HERE.