THE decision by Kedah to ban licence renewals of number forecast operators (NFOs) with immediate effect is expected to have manageable earnings and fair value impact on NFOs although this signals potentially greater regulatory risks which may dent sentiment.
For now, Kedah accounts for 3.1% and 2.7% of Berjaya Sports Toto Bhd’s (BST) and Magnum Bhd’s total outlets in the state respectively.
“There is no confirmation at this juncture as to how the ban will affect the existing NFO outlets in Kedah but it could mean they may be progressively shut as their gaming premise licences expire over the next 12 months based on our interpretation,” opined analysts Sherman Lam Hsien Jin and Foong Choong Chen in a gaming sector update.
“In the worst-case scenario w here all NFO outlets are ordered to close from yesterday (Nov 14) until further notice, we estimate the loss of contribution from these outlets will hit BST’s FY2022F/2023F core EPS (earnings per share) by a manageable 2%/3% and Magnum’s FY2021F/2022F core EPS by 2%/4%, with circa -4%/-4% impact on BST’s/Magnum’s DCF (discounted cash flow)-based fair values.”
Aside from Kedah, Kelantan and Terengganu (no NFO outlets operate in the latter two states), there are no other states governed by the Islamic Party of Malaysia (PAS).
“Nonetheless, we see this as a negative development as it highlights potentially greater regulatory risks for NFOs and may dampen sentiment on the sector in the near term,” emphasised CGS-CIMB Research.
On the overall, the research house reiterated its “overweight” outlook on the Malaysian gaming sector premised on the expected full NFO sales recovery in CY2022F.
“We prefer Magnum over BST given the former’s pure NFO exposure and potential monetisation of its 8% stake in U Mobile,” justified CGS-CIMB Research. “BST’s FY2022-2024F/Magnum’s FY2022-2023F dividend yields are attractive at 5.6%-8.2%/7.5%-7.6% per annum.”
UOB Kay Hian Research, who also remains “overweight” on the gaming sector and the NFO segment, expects earnings impacts at only about 4-5% of net profit “but absolute impact might be lower as some of the sales will be re-channelled to the legal states.”
From its respective NFO websites, the research house understood that there are about 43 4D outlets in Kedah – 20 BST, 11 Magnum and 12 Da Ma Cai.
“While this implementation does not come in as a shock as other PAS-led states in Malaysia including Kelantan and Terengganu have banned lottery sales previously, the implication on the country’s political direction is highly disappointing,” opined head of research Vincent Khoo.
“This will only fan the illegal operators’ market share gain and backfire on the Government’s need to raise revenue (although some lost business would be re-channelled to other non-PAS-controlled states).” – Nov 15, 2021
