Gaming sector faces unexpected setback with higher service tax

KUALA LUMPUR: The gaming sector is faced with an increased tax burden following the unexpected announcement that service tax in the country is set to rise.

Prime Minister Datuk Seri Anwar Ibrahim proposed at the tabling of Budget 2024 that the government will raise the service tax rate by two percentage points to 8%.

According to RHB Research, the quantum of increase for the gaming sector represents 1-2% of gross sales as the net payable service tax is net of gaming tax, pool betting duty and payout.

Numbers forecast operators (NFO) have been absorbing these taxes since the implementation of the Goods and Services Tax (GST) in 2015, while the service tax has applied to the gaming industry since the widening of scope and re-implementation of the Sales & Service Tax (SST) in 2018.

RHB said any reduction in prize payout or raising ticket prices to offset the tax increase could lead to decreased sales and a loss of market share to illegal NFOs.

“After factoring in the increased tax rate, we trim our FY24F-25F earnings for Magnum Bhd and Sports Toto Bhd by 4-5%, assuming that they absorb all the incremental cost without increasing the ticket price nor lowering the prize payout,” it said in a sector update.

The research firm also noted the absence of new positive catalysts for the sector as it believes the sector valuation, close to its mean, is fair and has already priced in the recovery in ticket sales.

It also said stricter legislation against illegal NFPOs and the legalisation of online gaming is not high on the government’s policy agenda for now.

RHB remains “neutral” on the NFO sub-sector as the recent state elections could improve the dividend outlook for the NFOs given the reduced uncertainty on outlet closure maybe decrease the need to retain cash.

“While both Sports Toto and Magnum offer 7% FY24F yields, our top pick is the latter given it is not exposed to the challenging operating environment in the UK, unlike Sports Toto (through HR Owen).

“However, we caution that if Magnum’s higher-than-average prize payout ratio continues, it poses downside risks to future earnings and dividend payouts,” it said.

With regards to Sports Toto’s luxury car business, HR Owen, RHB said it could continue to face pressure due to rising energy costs, wages and borrowing expenses.

Additionally, the launch of its Hatfield showroom could lead to increased depreciation and higher interest expenses, which are expected to impact FY24F (June) – potentially affecting HR Owen’s profitability.

“That said, Sports Toto’s dividends are primarily derived from its lottery business. Hence, the challenges at HR Owen are unlikely to hamper the company’s dividend outlook,” it said.