This article first appeared in The Edge Financial Daily on June 12, 2018

Berjaya Sports Toto Bhd
(June 11, RM2.56)
Downgrade to sell with an unchanged target price (TP) of RM2.20: Berjaya Sports Toto Bhd (BToto) will benefit from the zero-rated goods and services tax (GST) (from 6%), but we believe the impact will be short-lived, as we expect the gaming sector to be included in the new sales and services tax (SST) regime. The three-month “tax-free” period will no doubt be a boost to short-term earnings, but it does not address the structural problems facing the industry.

We believe BToto’s revenue was cut by 2% under the previous GST regime, as the company absorbed the cost instead of passing this on to its customers. The impact on BToto to its bottom line was more significant at around -20% a year.

However, we are of the view that the new SST regime could still expand to include number forecast operators (NFOs), as they contributed around RM150 million in GST based on our estimates, and this inclusion would also not have any direct impact on consumers. Hence, the higher profitability is only likely to last for the three months (June to August) before the SST is reintroduced in September.

The decline in NFOs’ revenue is a structural problem due to the more attractive payouts from illegal operators, and we believe the zero-rated GST will be help resolve the problem.

We believe that operators could have tweaked the payout to pass on the impact of the GST, but the widening of the current payout difference (against illegal operators), at around 28%, could cause a significant dip in revenue.

Unless there is a step-up in enforcement, or an increase in payout (which we think is unlikely for now), the problem is likely to persist, in which case the NFOs might not be able to enjoy the full benefit of the improving consumer sentiment.

As we are not expecting the benefits from the tax holiday to last beyond the three-month period, we are keeping our dividend discount model-based TP unchanged at RM2.20, but downgrading our call to “sell” from “hold” due to the recent run-up in share price post the announcement.

Upside risks include the no further taxes implemented on BToto and increased enforcement against illegal betting operators. — Affin Hwang Capital Research, June 11