• Stay NEUTRAL, with new DCF-derived MYR1.55 TP from MYR1.61, 4% upside. The service tax hike in Budget 2024 was an unexpected setback for the gaming industry. We cut our forecasts accordingly to reflect the increased overall tax burden. While ticket sales are on the rise and inching to pre-pandemic levels, we believe the current at mean valuation is fair and that the market has already factored in the recovery in ticket sales. That said, the stock currently offers an attractive c.7% yield. This report marks the transfer of coverage to Tai Yu Jie.

• Service tax hike. In Budget 2024, Prime Minister Dato’ Seri Anwar Ibrahim announced that the Government will raise the service tax rate by 2ppts, from 6% to 8%. Given gaming services fall under the taxable category of the Service Tax Act of 2018, this adjustment essentially represents an additional tax burden for the NFOs. However, the quantum is 1-2% of gross sales as the net payable service tax is net of gaming tax, pool betting duty and payout. Note that the NFOs have been absorbing these taxes since the implementation of the Goods and Services Tax (GST) in 2015 and also the service tax continues to apply to the gaming industry following the widening of scope and re-implementation of Sales & Service Tax (SST) in 2018.

• Impact to earnings. We understand that reducing the prize payout may not be an ideal strategy nor raising ticket prices as these could potentially lead to decreased sales and a loss of market share to illegal NFOs. Considering the higher tax rate, we cut our FY24F-25F (Jun) earnings by 4- 5%, assuming that SPTOTO absorbs all the incremental cost without increasing the ticket price or lowering the prize payout. We also note that while NFOs are eagerly awaiting stricter regulations against illegal operators and the legalisation of online gaming, we believe these policies are currently not a top priority for the Government.

• Headwinds ahead for HR Owen. Given the persistently high inflation in the UK (August CPI: +6.7% YoY), HR Owen's margins may continue to face pressure due to rising energy costs, wages, and stock-borrowing expenses. Additionally, the launch of its Hatfield showroom could lead to increased depreciation and higher interest expenses, which are expected to impact FY24F – potentially affecting HR Owen’s profitability. That said, SPTOTO’s dividends are primarily derived from its lottery business. Hence, the challenges at HR Owen are unlikely to hamper the company’s dividend recovery.

• Keep NEUTRAL. Post earnings cut, our DCF-derived TP is lowered to MYR1.55 (inclusive of a 2% ESG premium). Our TP implies 11.4x FY24F P/E (close to its mean), or at a slight discount to its closest peer Magnum (MAG MK, NEUTRAL, TP: MYR1.14) to account for its challenging operating environment in the UK (through HR Owen). Key downside risks include unfavourable luck factor, unfavourable policies, and softer-thanexpected ticket sales. The converse represents the upside risks.

Source: RHB Securities Research - 18 Oct 2023