Minimal impact seen for NFOs
Fewer special draws will not affect gaming companies much, say analysts
THE government’s decision to reduce the number of special draw days will have an insignificant impact on all numbers forecast operators (NFOs), with the move being seen as “not ideal” to curb social problems.
Primarily, special draws have lower margins, given the additional 10% tax imposed.
And the current 22 special draws that fall on Tuesdays only make up a small proportion of the total draws of NFOs.
PublicInvest Research has commented that the reduction in special draws will not likely have any material impact on society.
“We reckon that this is not an ideal solution to tackle social problems, as there are more pertinent issues for the government to review, such as the proliferation of illegal gaming activities.
“Gaming activities, which also include casino operations, have been criticised as having caused social problems but in our opinion, reducing the number of special draws is not likely to have any material impact on society,” it says.
Based on PublicInvest Research’s sensitivity analysis, Magnum Bhd and Berjaya Sports Toto Bhd (BToto)’s earnings will be reduced by 0.3% and 0.7%, respectively, for every one special draw reduction.
The three legal NFOs in Malaysia – Magnum, BToto and DaMaCai – run by Pan Malaysian Pools Sdn Bhd, draw thrice a week, with results announced on Wednesdays, Saturdays and Sundays.
Special draws, drawn on Tuesdays, are approved and granted by the government as a means to increase its coffers.
The special draw was first introduced back in 1999 to raise funds during the Nipah virus outbreak, which stemmed from the boom in pig-farming activities.
The government paid US$35mil or RM133mil (based on a US dollar/ringgit exchange rate of 3.8) in compensation for the 1.1 million pigs culled at an average price of US$32 (RM121.60) per pig.
Additionally, an estimated cost of US$136mil (RM516.8mil) was spent on the control programme from the Department of Veterinary Services.
According to Finance Minister Lim Guan Eng, a total of RM80.4mil in sin tax was collected from the draws in 1999.
Revenue collected from the special draws had increased to RM238mil in 2017 or averaging RM200mil annually from 2000 onwards.
At present, the proceeds are managed through a trust fund for social development programmes that benefit society and the nation.
On Tuesday, Lim announced that the government plans to reduce the number of special draws for all NFOs in 2019, as a move to cut down on the number of gambling days.
“This is so that gambling activities will not lead to social ills such as gambling addiction.
“The new policy comes in light of complaints that the special draws were a burden to society,” he said, adding that the new poli- cy will be announced during the tabling of Budget 2019 in November.
Maybank Investment Bank (IB) Research says that in 2018, BToto and DaMaCai were awarded 22 special draws, while Magnum was awarded 26 special draws by the previous government.
Normal draws total 156 to 157 each year. “Normal draws will incur 8% gaming tax (GT) on sales, 8% pool betting duty (PBD) on (sales – GT), 10% royalty to the Ministry of Finance or National Sports Council on pretax profit, and 6% sales and service tax on (sales - GT - PBD - prize payout) effective Sept 1, 2018.
“We estimate that the net profit margin on normal draws is about 10%.
“Special draws not only incur all of the aforementioned taxes, but also a 10% special contribution to the government on (sales – GT),” Maybank IB Research explains.
Apart from that, sales garnered during special draws are also typically 10% to 15% less than normal draws, due to their proximity to Wednesday draws.
The research house estimates that the net profit margin on special draws is less than 5%. Therefore, a reduction in the number of special draws is not expected to significantly impact NFO earnings.
CIMB Research concurs, stating that the profits garnered by the special draws are significantly smaller due to the extra special tax imposed.
“Assuming a reduction of five special draw days in a year, we believe that the impact on BToto’s and Magnum’s bottomlines would be less than 2%.
“In addition, even if no special draws are allocated for 2019 (which is highly implausible), both NFOs would only see a reduction of 6% to 7% in earnings,” says CIMB Research.
For the financial year ended April 30, 2018, BToto registered a net profit of RM230.45mil, on the back of a revenue of RM5.66bil.
Meanwhile, Magnum posted a net profit of RM206.62mil and a revenue of RM2.65bil for the financial year ended December 31, 2017.
Following Lim’s announcement, BToto’s share price dipped 4.2% to RM2.28 as of Thursday’s close, while Magnum’s share price fell by 5% to RM2.08.
BToto and Magnum are currently trading at a price-earnings multiple of 13.39 times and 12.88 times, respectively.
CIMB Research adds that the habitual nature of NFO bets will keep punters coming back and yield-seeking investors would also continue to look at NFOs as a defensive play with attractive yields.
Furthermore, UOB Kay Hian maintains an “overweight” on the NFO segment, on the back of stabilised ticket sales trend and attractive yields of more than 7%.
“Gaming duty hike could potentially be a key downside risk.
“Higher duties may force operators to pass on cost by lowering prize payout, which may in turn force more punters to patronise the illegal market which offers higher attractive prize payout,” says UOB Kay Hian.