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Has luck run out for gaming counters?


A Variety of reasons can be attributed to the fall in gaming companies with seemingly no end in sight for their woes.

The two gaming or numbers forecast operators (NFOs) that are listed on Bursa Malaysia are Berjaya Sports Toto Bhd (BToto) and Magnum Bhd.
Both companies have been plagued with negative sentiment and this has correspondingly been reflected in their share prices.

BToto seems to have fallen from grace and now trades at close to its 10½ year low at RM2.29 while Magnum last traded at near its 5½ year low of RM1.72.

Common to both of these companies is the increasingly difficult environment that they operate in with the rise in online gambling and the relative ease to conduct these activities from the comfort of home compared to having to journey to another place to place their bets.
Analysts have acknowledged these factors in their reports, however some of late have recently turned contrarian by issuing “buy” calls given the steep contraction in their stock prices.

A recent report by UOB Kay Hian (UOBKH) Research still maintained their “buy” call on BToto with a target price of RM3.15.
UOBKH believes that the overhang on BToto’s share price, which had fallen 21% in the year-to-date, is due to its investment excursions in related-party companies and also in part by the Inland Revenue Board’s (IRB) huge tax claims against industry peer Magnum.
The research house also notes BToto’s prospective yields which are at 7.3%-7.7% and says that this looks attractive, based on a payout assumption of 80%.

The narrative for Magnum is slightly different though, with the company being slapped with tax claims by the IRB.
Magnum was hit with notices of assessments with a penalty of RM476.47mil by the IRB in May. The breaking of the news also saw its downtrend accelerating and the stock plunged by 20% over the next few days to a low of RM1.68.

It was reported then on StarBiz that a whopping RM569mil or 19% had been wiped out of Magnum’s market capitalisation pursuant to the announcement.
Pursuant to this one off event, Magnum’s shares have not really recovered at all and they have been hovering in sideways trade for the past two months.

An analyst from CIMB Research in an earlier report on StarBiz was quoted as saying that the environment for Magnum and BToto would remain weak as they continue to battle illegal NFOs. 

“This will carry on until the Government manages to clamp down on illegal NFOs, which offer cheaper rates and evade taxes. Coupled with the weak consumer sentiment, it looks like there will be more downside than upside for the industry,” she says then.
This could explain why investors are still unwilling to put their money into these stocks until today despite the attractive yields and valuations presumably given that there is still no change the overall environment with ample alternative avenues for gamblers.
At present prices, BToto is trading at a price to earnings ratio (PER) of 12.8 times while Magnum’s valuation is at a PER of 16 times.

Whether or not both stocks offer opportunities for investors to invest is still open to debate given that the tide of negative sentiment on the industry has still not been lifted.
The bulls would say that both stocks have already over-corrected themselves and that a potential for a rebound could grow as a the days go by.
However, there is also the concern of the possibility of further decrease in dividends moving forward if such difficult sentiment continues to persist.

Hong Leong Investment Bank Research (HLIB) said in its recent report that there are no fresh catalysts now for BToto in view of the saturated NFO business and shrinking dividends amidst challenging operating environment and rampant illegal operators.
It notes that there are also other uncertainties in the ongoing disputes on the interpretation of the goods and services tax and non-deductible expenses for taxable income.
Moving forward there could be a spark of hope though for these listed NFO operators with the planned amendment to the Common Gaming Houses Act 1953, which aims to combat online gambling.

“While the proposed amendment on the Common Gaming House Act 1953 (which paves the way for an eventual liberalisation of online NFO) may have been delayed to 2018, we are still hopeful that this amendment could level the playing field within the NFO sector,” UOBKH says in their report.

UOBKH however notes that the planned amendment would only by a 2018 catalyst.
The research house also notes that both BToto and Magnum do not have their competitor Da Ma Cai’s flexibility in offering betting via the Internet.
Da Ma Cai is governed by the Tote Board instead of the Finance Ministry.
HLIB Research further notes that going online will be a possible growth strategy for these listed NFOs to tap into under-served areas and help grow their domestic business moving forward.

While all seems bleak at the moment for NFOs in the country, necessary and updated regulatory actions by the Government could help spark some life into these counters.

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