PETALING JAYA: The two percentage-point betting duty hike is viewed as a negative development for the gaming sector as it will crimp the earnings of the number forecast operators (NFOs), analysts said.

“Overall, we view the development negatively as higher betting duties lead to immediate earnings dilution,” Affin Investment Bank analyst Chong Lee Len said in a research note.

She expects net profit margins to fall from 10% to 9% – assuming an unchanged prize money structure, which yields a normalised prize payout of 66%.

“Hypothetically speaking, should NFOs attempt to preserve their current net profit margins of 10%, they will have to lower their prize monies by some RM200 which effectively lowers the theoretical prize payout from 66% to 64%. While small, this will still encourage more illicit bets,” she said.

In separate filings with Bursa Malaysia on Thursday, Multi-Purpose Holdings Bhd (MPHB), Tanjong plc and Berjaya Sports Toto Bhd (BToto) said their subsidiaries were notified by the Finance Ministry on June 29 that betting duties had been raised to 8% from 6% previously to be effective from June. Yesterday, Olympia Industries said that its wholly-owned subsidiary, Diriwan Corp Sdn Bhd, had been notified on it as well.

The last time betting duty was increased was in November 1998 at the height of the Asian financial crisis. At that time, the betting duty was revised to 10% from 7%.

However, in December 2002, it was decreased to 6% due to competition from illegal operators.

ECM Libra Investment Research noted that NFOs might not lower their prize payout ratios to preserve margins as the industry contracted every year until 2003 when the first prize on 4D Big and 4D Small were reduced by RM200 each to RM2,000 and RM3,000 in response to the November 1998 duty increase.

“Taking a leaf from history, this option may not be pursued this time. The alternative is to absorb the increase and suffer margin compression in order to maintain revenue growth,” it said.

ECM Libra expects Tanjong to be the least affected by the hike as only 20% of its earnings are derived from the NFO business while pure NFO concern BToto will be the worst hit. It also does not discount the possibility of more tax or duty hikes at the Budget 2011 in October.

On a full-year basis, it is trimming Tanjong’s earnings estimates by 5% and BToto’s by 11%.

An analyst with a local research house, however, deems the 2% hike as manageable for NFOs. “Although negative in general, we believe that the NFOs are still able to remain relatively competitive even if they were to reduce their prize payouts as the quantum of reduction is expected to be marginal.”

He expects NFO operators to appeal for a reduction in prize payout ratio. According to the NFO websites, the prize payouts have not changed as at press time. This latest development follows the decision last Friday by the Government, which appears to be signalling that sin sectors especially gaming could be in for a round of unfavourable reforms.