GST playing out as expected for gaming sector

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Gaming sector
(April 16)
Maintain neutral:
Numbers forecast operators (NFOs) have absorbed the 6% goods and services tax (GST) without cutting prize payouts, causing earnings per share (EPS) to be negatively impacted by about 10%. Industry lotto sales recorded in the two weeks after April 1 eased 4% compared with the two weeks before. We had anticipated the above. Maintain earnings estimates, “hold” calls and target prices on Berjaya Sports Toto Bhd and Magnum Bhd. We are still “neutral” on the sector.

Since the 6% GST was implemented on April 1, we visited three NFO outlets, one from each of the national NFOs. Overall, our findings were very much within expectations as: (i) the NFOs are absorbing the 6% GST as anticipated; (ii) no remedial actions have been taken to neutralise the 6% GST as expected; and (iii) we can expect downward pressure on NFO sales going forward.

While lotto games account for only some 15% of industry NFO sales, their sales can be accurately estimated. We estimate industry lotto sales in the two weeks after April 1 eased 4% compared with the two weeks before. Our random opinion poll — conducted to give us an idea on where classic 4D (about 80% of industry NFO sales) may go — revealed that no punter will increase their bet size anytime soon.

Lotto sales so far suggest total NFO sales (classic 4D, lotto and so on) may ease by a wider 4% in 2015 than our estimate of -2%, but we note BSports Toto and Magnum’s EPS are not very sensitive to sales. We estimate every 1% decrease in sales translates into only 1% easing in their EPS. Therefore, we maintain our estimates, “hold” calls and target prices on BSports Toto (RM3.18) and Magnum (RM2.65) for now. We continue to foresee three themes: (i) lower revenues; (ii) lower earnings; and (iii) lower dividends.

We expect BSports Toto’s dividend per share to fall from 26.5 sen in financial year 2014 ended April (FY14), to 21.5 sen in FY15 and 20 sen in FY16 (first full year of GST) and for Magnum from 20 sen in FY14 ended December to 15 sen in FY15 (nine-month GST impact). The only saving grace is the lower dividends still translate into decent yields of about 5% per year. — Maybank IB Research, April 16


This article first appeared in The Edge Financial Daily, on April 17, 2015.