Berjaya Sports Toto (BST) will benefit from the zero-ised GST (from 6%), but we believe the impact will be short-lived, as we expect the gaming sector to be included in the new SST regime. The 3-month “tax-free” period will no doubt be a boost to short-term earnings, but it does not address the structural problems facing the industry. As such, we are keeping our DDM-based TP unchanged at RM2.20, but downgrading the stock to SELL from HOLD as the recent share-price outperformance is not sustainable, in our opinion.

Significant Cost Savings, But Not Sustainable

We believe that BST’s revenue was cut by 2% under the previous GST regime, as the company absorbed the cost instead of passing this on to its customers. The impact on BST to its bottom line was more significant at around -20% a year. However, we are of the view that the new SST (Sales and Service Tax) regime could still expand to include the NFOs (Number Forecast Operators), as they contributed around RM150m in GST based on our estimates and this inclusion would also not have any direct impact on the consumer. Hence, the higher profitability is only likely to last for the 3 months (June-August) before SST is reintroduced in September.

Still at a Disadvantage

The decline in NFOs’ revenue is a structural problem, due to the more attractive payouts from the illegal operators, and we believe the zero-ised GST will be help resolve the problem. We believe that operators could have tweaked the payout to pass on the impact of GST, but the widening of the current payout difference (against illegal operators), at around 28%, could cause a significant dip in revenue. Unless there is a step-up in enforcement, or an increase in payout (which we think is unlikely for now), the problem is likely to persist, in which case the NFOs might not be able to enjoy the full benefit of the improving consumer sentiment.

Maintaining TP at RM 2.20, Downgrading to SELL

As we are not expecting the benefits from the tax holiday to last beyond the 3-month period, we are keeping our DCF-based TP unchanged at RM2.20, but downgrading our call to SELL from HOLD due to the recent run-up in the share price post the announcement. Upside risks: no further taxes implemented on BST; increased enforcement on illegal betting operators.

Source: Affin Hwang Research - 11 Jun 2018