Magnum a beneficiary of Malaysia’s changing tax regime

KUALA LUMPUR: Analysts are positive on number forecast operator (NFO) Magnum Bhd’s (Magnum) outlook as it stands to gain from the removal of the Goods and Services Tax (GST) and uncertainties from the Sales and Service Tax (SST).

Kenanga Investment Bank Bhd (Kenanga Research) saw that in the past year, Magnum managed to post stable ticket sales with an improving trend while luck factor has normalised except for the first quarter of 2017 (1Q17), which was badly hit by high estimated prize payout ratio (EPPR).

“As such, we believe the declining trend should have bottomed. On the other hand, the reduction of GST to zero per cent effective June 1 should bode well for the NFO operators as the players have been absorbing the six per cent tax since the implementation in April 2015.

“Thus, the six per cent saving is likely to go straight to its bottom-line if the industry is not imposed with SST. The industry was exempted from SST prior to the implementation of GST.”

Meanwhile, AllianceDBS Research Sdn Bhd (AllianceDBS Research) saw that Magnum’s share price has re-rated post elections.

“The stock has re-rated post general election -- rising 18 per cent since May 14 -- mainly driven by rising optimism that the new administration will intensify its efforts to curb illegal NFO activities, and potential earnings accretion from the abolishment of GST,” it said in a separate report.

“With regard to the illegal NFOs, we understand that competition remains high and we do expect that some time is needed to curtail the activities of illegal NFOs even if the new administrations were to intensify its efforts going forward.”

On the GST front, the NFOs have absorbed the GST in the past and a complete abolishment could raise Magnum’s earnings by about 10 per cent.

Nonetheless, there is a risk that the government could raise the gaming tax to make up for the tax revenue shortfall arising from the abolishment of GST.

This could lead to muted earnings impact on the NFO players, AllianceDBS Research said.

“Given the lack of clarity with regard to the two issues outlined above, we are keeping our earnings estimates largely unchanged for now.”

This comes as the group reported a core net profit of RM55 million for in 1QFY18. The stronger results year on year were mainly due to higher gaming revenue, and better luck factor.

The 1Q18 net profit rose four per cent to RM54.9 million from RM52.8 million in the preceding quarter on the back of a six per cent hike in revenue to RM712.4 million from RM675.1 million previously.

The improved results were largely driven by higher NFO ticket sales by six per cent to RM774.3 million from RM733.4 million but mitigated by the normalisation of EPPR to 66.1 from 64.7 per cent, said Kenanga Research.