PM/FM Datuk Seri Anwar Ibrahim announced that the number of special draws for CY23 will be eight (vs. 22 in 2022). Despite the reduction in number of special draws, we expect minimal impact to earnings due to (i) special draws typically have lower sales compared to normal draws due to its non-routine nature; and (ii) a portion of special draw sales cannibalizes the sales from normal draws, which have a higher margin resulting in a net negative impact to earnings for this portion of sales that were cannibalized. Maintain BUY with an unchanged TP of RM2.27 based on DCF valuation with WACC of 9% and TG of 1.5%. The stock currently provides a generous FY23 yield of 8.8%.

NEWSBREAK

PM/FM Datuk Seri Anwar Ibrahim announced on 5 Dec (Mon) the government will revert the number of special draws by NFOs back to eight times a year starting from 1 Jan 2023, similar to back in 2019 when the Pakatan Harapan was in government. This was reduced from the 22 special draws allocated for 2022. (The Edge)  

HLIB’s VIEW  

NFO draws and tax structure. The number of special draws in a calendar year are assigned annually by the MOF. To recap on the tax structure, for normal draws, NFOs pay 8% of gaming tax on gross sales and 8% of pool betting duty on gross sales net of gaming tax. As an illustration (see Figure #1 below), for RM100 gross sales, this will amount to RM8 gaming tax, and RM7.36 pool betting duty (i.e. 8% of tax on gross sales net of gaming duty or RM92). Consequently the net revenue for normal draw amounts to RM84.64. For special draws, NFOs will have to pay an additional 10% tax from the gross sales net of gaming tax, i.e. RM9.20. Consequently, the net revenue for special draw amounts to RM75.44.

Minimal impact to earnings. We are not overly concerned on this development as special draws have minimal impact to NFO’s earnings. Firstly, special draws typically have lower sales compared to normal draws because of the former’s non-routine nature. Punters typically prefer to play on routine normal draws which are held on Wed, Sat and Sun, while special draws are held on selected Tuesdays as prescribed by MOF. Secondly, a portion of special draw sales cannibalizes the sales from normal draws. Recall that special draws have higher tax than normal draws, thus, this results in a net negative impact to earnings for this portion of sales that is cannibalized.  

Forecast. We make no changes to our forecasts as we believe the reduction in special draws will have minimal impact to earnings.

Maintain BUY with an unchanged TP of RM2.27 based on DCF valuation with WACC of 9% and TG of 1.5%. As we expect the earnings impact to be minimal, we believe the current kneejerk reaction and weakness in share price presents a good opportunity to accumulate. At RM1.60 closing price, our projected yield for FY23 is generous at 8.8%.

Source: Hong Leong Investment Bank Research - 6 Dec 2022