Written by RHB Research
Tuesday, 31 December 2013 10:06
Maintain neutral: We continue to hold the view that the earnings of the country’s existing casino operators and number forecast operators (NFOs) could be hit should the 6% goods and services tax (GST) be imposed on the sector when it rolls out on April 1, 2015.
Although Malaysia’s current gaming-related taxes (25% casino tax, 8% gaming tax and 8% pool betting duties on NFOs) are already higher than Singapore’s (GST of 7% on top of 5% and 15% taxes on the VIP and mass market segments respectively), we do not discount the possibility of more hikes in the existing gaming duties, as the government seeks ways to beef up the nation’s tax collection.
The 6% GST, if imposed on top of the existing taxes, could potentially undermine our earnings forecasts for the gaming counters under our coverage by 6.3% to 13.8%.
We are forecasting for sectorial earnings growth of 5.6% for calendar year 2014 (CY14) and 6.7% for CY15. This pales in comparison with Macau’s casino operators, for which consensus has projected average earnings growth of 22.4% for CY14 and 17.8% for CY15. The sturdier growth in Macau’s gaming market, in our view, is mainly underpinned by the continued influx of visitors from China in tandem with the domestic economy’s expansion.
That said, we believe growth-seeking investors are likely to increase their exposure to Macau’s gaming market while staying away from Malaysia-listed gaming stocks for now in view of the relatively less exciting local growth prospects.
Although the casino operators in Macau are already trading at 30% to 45% premiums to Malaysia’s gaming stocks, this valuation gap is likely to remain in the near term.
Given the potential earnings erosion arising from GST and the relatively more muted growth prospects for Malaysia’s gaming companies vis-à-vis casino operators in Macau, we maintain our “neutral” stance on the sector going into 2014.
Among the stocks we cover, Berjaya Sports Toto Bhd (“buy”, fair value [FV]: RM4.46) is the only “buy”, given its relatively appealing dividend yield of 6.3% to 6.9%.
While we find some comfort in Genting Malaysia Bhd’s (“neutral”, FV: RM4.56) proposed RM5 billion capital expenditure to rejuvenate its flagship resort in Genting Highlands over the next 10 years, we hold the view that it is too early to quantify the potential earnings accretion, as the first phase of the proposed facelift will only be completed by the second half of 2015. — RHB Research, Dec 30
This article first appeared in The Edge Financial Daily, on December 31, 2013.