We believe that the transition from GST to service tax will be largely neutral on earnings of the gaming industry. Maintain OVERWEIGHT on the sector with GENT being our top pick. The Royal Malaysian Customs Department yesterday announced that gaming operators, which consist of casino operators and number forecasting operators (NFOs), will be subject to 6% Service Tax, effective from 1 Sep 2018. This development comes largely within expectations. As highlighted in our previous report, the gaming operators (Genting Malaysia, BUY, TP: RM5.50; Berjaya Sports Toto, HOLD, TP: RM2.20; Magnum, HOLD, TP: RM2.10) had absorbed the previous Good and Services Tax (GST). A complete abolishment of GST could raise earnings of these operators by about 10%.
Nonetheless, we did highlight the government may raise gaming taxes to make up for any tax revenue shortfall arising from the abolishment of GST. While further details will be unveiled in the coming weeks, we believe that the authorities will adopt a similar formula to the one found in the PDF for GST computation to calculate service tax liabilities for the gaming operators. Should the government adopt a similar formula, service tax to be imposed on Genting Malaysia would be (gross gaming revenue – casino tax) X 6/106. For the NFOs, the service tax would be (sales – gaming tax – pool betting duty – expected prize payout) X 6/106. As a whole, other than a temporary relief arising from the “zeroization” of GST between 1 June to 31 August (resulting in <3% earnings accretion for the gaming operators based on our calculation), we believe that the transition from GST to service tax will be largely neutral on earnings of the gaming industry. As such, we are maintaining our earnings’ forecasts for the gaming players.
We maintain our Overweight recommendation for the sector with Genting Bhd (BUY, TP: RM11.95) being our top pick for the sector. Genting Bhd (GENT) is expected to be re-rated going forward, supported by the progressive launches of key developments in the Genting Integrated Tourism Plan (GITP). Earnings’ recovery is also expected at Genting Singapore (GENS), a subsidiary of GENT. As the parent company of GENS and Genting Malaysia (GENM), we believe that GENT offers a cheaper exposure to both subsidiaries.
