Gaming sector upgraded due to lower duty than expected

PETALING JAYA: The gaming sector has been upgraded to an Overweight from Market Weight previously, as UOB KayHian Research expects casino duty for the VIP segment to be raised to 20% of gross gaming revenue, lower than the initially expected 35%.

In a report, the research house said its channel checks firmly suggested that duty for the VIP segment would be raised by 10 percentage point to 20% from January 2019 onwards.

This, it said, was consistent with the Genting Group’s earlier announcement, which inferred that its casino gaming duties would be subject to 10 percentage point hikes.

It noted that the announcement during Budget 2019 had only referred to a singular rate of 35%, sparking concerns among investors.

“Given that the negative impact from the gaming tax hike has been fairly priced in, and with the lower-than-initially expected VIP gaming tax serving as a pleasant surprise, investors may now refocus on Genting Group’s catalysts in 2019,” it said.

The research house said Genting Malaysia Bhd’s share price, from its current low base, could react positively to the soon-to-beopened indoor theme park, which features over 20 rides and attractions, as well as the opening of the Fox Theme Park, slated for the first quarter of 2019.

“Both openings will significantly raise visitor arrivals to Genting Highlands with modest spillover into gaming volumes, particularly the mass market segment,” it said.

It also expects parent company Genting Bhd’s share price to trend up in the lead-up to Genting Singapore’s submission of its bid for the Japan integrated resorts concession, anticipated to take place in the second half of 2019.

The share prices of Genting Malaysia and Genting Bhd have dropped by 20% and 3% since the Budget 2019 speech, down 38% and 29% from their respective year-to-date peaks.

Genting Malaysia was upgraded to a Buy with a higher target price of RM4.30, while its 2019-2020 earnings before interest, tax, depreciation and amortisation (EBITDA) was raised by 18%-19%, on revised assumptions of a lower increase in the VIP gaming tax, as well as lower cost cuts.

“We continue to expect Genting Malaysia to conduct cost-cutting measures to mitigate the impact of the tax hike. “However, we have revised down our assumption of the annual 2019-2020 cost cut from RM200mil (about 3% ofthe total cost of the Malaysian operations) to RM100mil,” it said.

It noted that a 20% VIP gaming tax should not force Genting Malaysia to cut cost as severely as originally expected, and instead, induce the group to expand its non-gaming and non-core related ventures.

For the parent company, the research house has maintained its Buy call on the counter, with a higher target price of RM8.05, while the 2019-2020 EBITDA has been revised by 5%-6%.

“We still prefer Genting Bhd over Genting Malaysia, as it is cheaper and has indirect exposure via Genting Singapore on stable Singapore operations and greenfield integrated resorts opportunity in Japan,” it said.

However, it noted that there were impairment risks in the group’s investments in its non-core businesses, such as pharmaceutical company TauRx.