Genting feels the pain while hospital operators gain, FMCG counters neutral

The higher taxes in Budget 2019 make RWG, operated by Genting Bhd, the heaviest taxed casino in Asia


The higher sin tax announced in Budget 2019 has hit gaming giant Genting Group the most due to its casino operations.

Genting Malaysia Bhd, priced at RM4.54 last Friday, closed at RM3.64 yesterday as analysts downgraded the counter.

It returned a negative 33% year-to date (YTD) and a loss of 29% in the past 52 weeks.

The stock fell 26% in the past month, while trading a t 14.8 times trailing 12-month earnings per share (EPS) and 13 times its estimates for the coming year.

The group’s flagship Genting Bhd has lost 6.38% in value over the last four trading days. It closed at RM6.74 yesterday and fell by 14% in the past month and returned a negative 25% YTD and a loss of 26% in the past 52 weeks.

Genting Bhd trades at 19.7 times its trailing 12-month EPS and 10 times its estimates for the coming year.

The higher taxes in Budget 2019 make Resorts World Genting (RWG), operated by Genting Bhd, the heaviest- taxed casino in Asia, according to Maybank Investment Bank Bhd (Maybank IB).

Its analyst Yin ShaoYang said the new casino duty rate of 35%, effective Sales and Services Tax (SST) of 3.7% and corporate tax rate of 24% “crowns” RWG as the heaviest-taxed casino in Asia.

Casinos in Macau are taxed at 39% of gross gaming revenue, but are exempted from corporate tax.

“We estimate the casino licence fee and duty rate hike will cut RWG pretax margins to 25%-26%,” Yin said in a note recently.

Reflecting the new casino licence fee and duty rate hike, Maybank IB cut their financial year 2019/2020 (FY19/FY20) earnings forecasts for Genting Malayia by 32% and 29% respectively, and its FY19/FY20 Genting Bhd earnings estimates by 13%/13%.

“Genting Malaysia earnings are most impacted as it owns 100% of RWG, while Genting Bhd earnings are more diverse as it derives about 40% of earnings from Genting Singapore Ltd and it charges Genting Malaysia 6% of RWG revenue as licensing and management fees, which are unaffected by the higher casino licence fee and duty rate,” he added.

The government last Friday raised casino duties to 35% from 25% on gross collection. The current gaming taxes for the VIP and mass market segments are 10% and 25%.

Gaming machine duties were raised from 20% to 30% on gross collection.

Casino licence fee was raised to RM150 million from RM120 million and machine dealers licence increased from RM10,000 to RM50,000 per annum.

The casino licence fee and duty rate hike are the largest on record and the last time the casino duty rate was hiked was in 1998, from a scale of 22%-25% of gross gate revenue (GGR) to a standardised 25% of GGR.

The move negatively impacted casino operator, while number forecast operators saw a halving of special draw days.

Hong Leong Investment Bank Bhd (HLIB) dropped Genting Bhd from its top pick list and downgraded it to a ‘Sell’ with a lower target price (TP) of RM4 from a ‘Buy’ call with a TP of RM5.80 after factoring in the earnings revision from the additional taxes impacts and lower enterprise value to pretax profit multiple for RWG due to the increase in gaming tax.

“Similarly, we reduce Genting Bhd to ‘Hold’ (from ‘Buy’) with a lower TP at RM7.51 (from RM12.27), based on sum-of-parts valuation after consolidating the forecasts and TP changes in Genting Malaysia,” its analyst Jeremy Goh said in a note yesterday.

HLIB maintained a ‘Hold’ call on Berjaya Sports Toto Bhd with a lower discounted cashflow derived TP of RM2.16 (from RM2.36) after factoring in the lower number of special draws days.

“The reversal from earnings growth to earnings contraction expectations, as well as the extra risk on margin compression would no longer entice the interest from investors,” Goh said.

Putrajaya’s move to put an excise duty of 40 sen per litre from April 2019 for non alcoholic beverages containing added sugar of more than 5g per 100ml and for fruit or vegetable juice containing added sugar of more than 12g per 100ml has had less of an impact on fast-moving consumer good (FMCG) counters.

Nestlé Malaysia Bhd was up 0.4% from last Friday at RM143.60 to RM144 a share at yesterday’s closing.

However, analyst consensus rating is equivalent to ‘Sell’. The stock has returned 42% so far this year and a gain of 67% in the past 52 weeks.

Nestlé trades at 50.5 times trailing 12-month EPS and 47 times its estimates for the coming year.

To put things into perspective, the sugar tax will see the convenience store price of a small bottle of Coke (250ml) increasing from RM2.80 to RM2.90 (+3.6%) and as such is potentially negative for food and beverage manufacturers.

HLIB expect the tax to have a minimal impact on Nestlé’s earnings as a large portion of its Milo and Nescafé products sold is in powder form as opposed to in ready-to-drink form.

“Based on a standard can size of Milo (240ml), this works out to be 9.6 sen, so on a shelf price of RM3.20 for a can of Milo, or Nescafé, this works out to be an increase of just 2.9%,” Goh said.

MIDF Amanah Investment Bank Bhd said beverage manufacturers heavily reliant on sugar will partially mitigate the impact with low refined sugar price.

The departure levy to be imposed on all outbound travellers (both local and foreign) by air starting June 2019 (RM20 to Asean countries and RM40 for others) is not expected to hit airport operator Malaysia Airports Holdings Bhd (MAHB).

JPMorgan analyst Mak Hoy Kit does not expect any major impact on MAHB’s passenger movement growth given the inelastic price nature.

Healthcare counters have been the major gainers from Budget 2019 announcement. KPJ Healthcare Bhd jumped 6% to RM1.10 a share yesterday as trading volume tripled since last Friday.

IHH Healthcare Bhd rose 0.8% to RM5 apiece and is trading at 125 times trailing 12-month EPS and 52 times its estimates for the coming year.

The government, in Budget 2019, announced three measures to support healthcare coverage for the B40 (bottom 40%) segments.

In partnership with the private insurance industry, Putrajaya will pilot a national B40 Health Protection Fund (HPF) to provide free protection against top four critical illnesses (heart, stroke, kidney and cancer) for up to RM8,000 and up to 14 days of hospitalisation income cover at RM50 per day starting Jan 1, 2019.

The government will allocate about RM29 billion to the Ministry of Health (MoH) including RM10.8 billion to provide medicine, and upgrade and improve the quality of health services at clinics and hospitals.

Analysts consider the incentives and insurance coverage benefits may help increase volumes at private hospitals, given the long waiting time at public hospitals.

JPMorgan reckons that KPJ may benefit the most given its exposure to the mass market.

HLIB is also positive on the B40 HPF as this will enable a greater number of the population to gain access to treatments at private hospitals.

“This marks a significant development for our healthcare sector as this initiative essentially represents a shift of patient volumes to the private sector backed by a private-sector-led funding model.

“This scheme could potentially increase the utilisation rate of medical equipment (MRI, CT-scans) and the volume of pathology lab work (blood work, urine test and biopsy) carried out at private hospitals,” the research arm said.

The increased healthcare allocation will also benefit Pharmaniaga Bhd being the sole concession holder to supply and distribute drugs and medicinal products to 148 government hospitals and 1,400 clinics.

It is also positive for UEM Edgenta Bhd as analysts can expect a higher work order from the MoH.