By NUR HANANI AZMAN / Pic by TMR FILE PIX

KEDAH decision to ban all gaming shops’ operations by not renewing their business licences issued by local councils will fuel the illegal number forecast operators (NFOs).

RHB Investment Bank Bhd (RHB Research) analyst Loo Tungwye said there is a possibility punters in Kedah may switch to illegal gambling operators as they are unable to buy from a licensed outlet now and the government would in turn lose tax revenue.

To operate a NFO outlet, the operator needs a gaming license which is issued by the Ministry of Finance (MoF) and a business license which is normally issued by the state/local council.

“NFOs are given a set number of gaming licenses by the MoF. However, NFO still needs the business licenses issued by the local government to operate in a state. NFOs may seek to discuss with the relevant authorities to see if they are able to relocate some of the outlets to the other states,” he told The Malaysian Reserve (TMR).

UOB Kay Hian Malaysia head of research Vincent Khoo said the move by the state government will have a significant impact on the NFOs.

“While licenses are issued by the federal government, states have the executive power. Kelantan and Terengganu, which are also PAS-controlled, have existing bans on the NFOs.

“No recourse is available for the NFOs. There’s definitely negative implications on the economy,” he told TMR.

In a research note, Loo and fellow analyst Lee Meng Horng, noted the number of outlets in Kedah is relatively lesser compared to other states. The number of Magnum Bhd outlets in Kedah is 13 while total outlets in Malaysia is 485 while Berjaya Sports Toto Bhd (BToto) has 20 outlets in Kedah versus a total of 680 outlets across Malaysia.

Assuming all Kedah outlets are closed by end 2021, impact to FY22F-23F’s Magnum earnings is minimal at 3% and BToto’s FY22-24F earnings at 2.7%-3.1%, the report stated.

The impact on earnings could be further mitigated by Kedah ticket sales losses potentially spilling over to other neighbouring states.

“We believe outlet bans in other states are unlikely to happen, given the significant annual tax contributions from the NFO industry (RM2 billion-RM3 billion per annum) due to the multiple taxes imposed,” the analysts said.

Loo and Lee have thus maintained a ‘Buy’ recommendation on Magnum and BToto with a target price of RM2.58 and RM2.34 respectively.

The negative from this newflow will be overcome by expectations of strong ticket sales recovery since reopening of the economy from the lockdown. 

“Further upside could come from legislation of stricter gambling laws and potential monetisation of Magnum’s stake in U Mobile. Key risks include another Covid-19 wave leading to outlet closures, changes in gaming taxes, and luck factor,” the analysts said.

CGS-CIMB Securities Sdn Bhd analyst Sherman Lam Hsien Jin estimated the loss of contribution from loss of Kedah outlets will hit Berjaya Sports Toto Bhd (BToto)’s FY22F/23F core earnings per share (EPS) by a manageable 2%-3% and Magnum Bhd’s FY21F/22F core EPS by 2%-4%.

He sees this as a negative development as it highlights potentially greater regulatory risks for NFOs and may dampen sentiment in the sector in the near term.

“BToto and Magnum may book net losses in third quarter (3Q) before returning to profitability in 4Q. Given the expected losses in 3QCY21F and based on 2QCY21, we think both NFOs’ dividends may only resume in 4Q. 

“We see Magnum declaring 3.3 sen dividend per share (DPS) in 4Q (95% payout for FY21F) while BToto may pay 11.3 sen DPS in FY6/22F (95% payout),” he wrote in a research note on the sector companies yesterday.

CGS-CIMB retained its ‘Overweight’ rating on the gaming sector, premised on the expected sales recovery for NFOs in CY22F.