- We maintain BUY on Genting Malaysia Bhd (GenM) with an unchanged fair value of RM4.30/share.

- In spite of the negative impact from the implementation of GST (if any), we remain positive on GenM for now. In addition, the implementation of GST is still uncertain.

- We believe that the group’s fundamentals are healthy, underpinned by a growth in spending yields and casino patronage in “Resorts World Genting” and “Resorts World New York”. Newsflow may also come in the form of a joint venture with Genting Bhd on “Resorts World Las Vegas”.

- GenM is currently trading at an undemanding FY14F PE of 13x versus the simple average PE of 13.3x for casino companies (ex-Nagacorp) listed in Hong Kong.

- Lately, reports on the implementation of GST (Goods and Services Tax) in Malaysia have been intensifying.

- The implementation of GST without any reduction in casino or corporate tax rate is not positive for GenM. This is because GST might not be passed on to casino customers.

- GenM might have to absorb the GST imposed on casino wins. This is the case in Singapore where casinos absorb the GST rate of 7%.

- If a GST rate of 3% were to be imposed, GenM’s FY14F net profit would fall by 9%. This is assuming that there are no changes in the other tax rates e.g. casino and corporate.

- If the GST were to be a hefty 7% akin to Singapore, GenM’s FY14F net profit would shrink by 19%. GenM’s FY14F PE would increase to more than 16x.

- GenM’s net earnings for FY14F would decline by 14% if its casino wins were taxed at 5%.

- Combining a 3% GST and casino taxes, GenM would be paying taxes of almost 28% on its gaming revenue.

- Including corporate tax, GenM’s cash outflow for taxes would be one of the highest in the world. Although Macau has an effective gaming tax rate of 38% to 40% on revenue, it does not have corporate taxes.

- As mentioned before in previous reports, we estimate that GenM recognised gaming and corporate taxes of RM1.3bil in FY12. From FY08 to FY12, we estimate that GenM contributed RM6.8bil to the country’s tax coffers.

Source: AmeSecurities