boostmy

A RM5.5b mistake on Genting Malaysia?

boostmy
Publish date: Thu, 11 Apr 2019, 04:25 PM
boostmy
0 15
Bursa Malaysia (KLSE) stock market insights, strategy and analysis. Helping you boost your portfolio returns.

1. Introduction

On 2nd November 2018, the Government announced an increase in casino and gaming machine taxes which has not been raised since 2005.

Among the announcements were an increase in casino license from RM120 million to RM150 million per annum and casino duties to be increased up to 35% on nett collection.

The excerpt from the budget announcement available from treasury.gov.my:

2. The aftermath

When the market opened on the 5th of November 2018, Genting Malaysia’s share price fell RM0.93 or 20.4% from RM4.54 to RM3.61, wiping out RM5.5b in market capitalization.

3. Sell down justified?

There has been no confirmation that the casino duty will be raised up to the maximum of 35% per the excerpt above. This means that anywhere between 25% (the current rate) and 35% is a possibility, and could make a huge difference to Genting Malaysia’s actual earnings.

Meanwhile, it is also understood that VIP and non-VIP wins have different tax rates, adding to the confusion – are both going to increase to a flat rate of 35%?

The media, meanwhile stated repeatedly that casino duties have not been raised in 20 years since 1998. This is clearly wrong, contradicting the Government’s official statement above which states that gaming taxes last raised in 2005.

Most analysts, taking the safest route, have chosen to apply the maximum 35% casino duties on casino revenue, which they say will reduce Genting Malaysia 2019 and 2020 EBITDA by RM600-700m.

4. Clues from Genting Malaysia’s 2018 annual report

Reading through the annual report, something caught my attention. On page 44, Part 2 of the Annual Report 2018, there is a diagram that says Genting Malaysia made a total tax contribution of RM4.7b in 2018 and RM4.8b in 2017.

 

We know the company paid RM297.4m in income taxes for 2018 (before using its tax allowance to help its P&L statement), hence contributions to casino duties and SST should be RM4.4b:

RM4.7b (total tax contribution in 2018) – RM0.297b (income tax in 2018) = RM4.4b (casino duties and SST)

 

 

 

Now, researching further on how casino duties and SST taxes are calculated, I managed to find an example provided by the Royal Malaysian Customs:

5. Genting Malaysia’s actual casino duties  

Now working backwards on Genting Malaysia’s net gaming wins (net of casino duties, SST and incentives) of RM7.761b for 2018 and the RM4.4b in casino duties and SST computed above, I attempted to compute the % of casino duties paid by the company.

 

RM7.761b (net gaming wins) + RM4.4b (casino duties and SST) = RM12.16b (gross gaming wins)

Hence,

RM4.4b / RM12.16b = 36.2% (casino duties and SST)

If my calculations are correct, this means that Genting Malaysia already pays a rate higher than the 25% gaming tax assumed by almost everyone, making the tax increase in 2019 to be a non-event.

This could also explain why Genting Malaysia actually posted better earnings in 2005 compared to 2004, which is the last time gaming taxes were supposedly raised.

6. Calculating backwards using 6% SST rate and 25% casino duty rate

Using the custom’s example, we are able to compute the SST (6%) paid using this formula:

RM7.761b – [RM7.671b / (1-0.06)] = -RM0.495b (SST paid at 6%)

Next, we can compute the casino duties paid using this formula:

RM7.761b + RM0.495b = RM8.256b (pre SST gaming wins)

RM8.256b – [RM8.256b / (1-0.25)] = -RM2.752b (casino duty paid at 25%)

Adding up SST paid, casino duties and income taxes:

RM2.752b + RM0.495b + RM0.297b = RM3.544b (total taxes paid)

This RM3.544b does not tally with the stated RM4.7b taxes contributed in 2018 per the annual report. 

7. An RM5.5b or RM0.93 per share mistake?

So did investors make an RM5.5b mistake assuming Genting Malaysia will be badly hit by the increase in casino duties? Only time will tell, in May when they announce the first quarter results.

Whatever the case, Genting Malaysia is trading at below its net tangible assets of RM3.22 and the lowest among its peers (globally) in terms of EV/EBITDA. And this factors in a large drop in the denominator based on analyst forecasts.

I welcome comments to correct me if I am wrong. 

Genting Malaysia has also been doing some good deeds for the Government and Rakyat recently:

Related Stocks
Discussions
2 people like this. Showing 9 of 9 comments

hellbender

The way i see it, there is a vendetta on Genting because Genting was seen to support the BN Govt. No choice Genting has to do the bidding of the current government under Mahathir. Currently not even 1 year has passed and already got so many political moves against GENTING: 1) Casino Tax 2) Levy Tax 3) Equanimity ... still got 4 more years to go. Hold tight cause the road is rough ahead. Now you see the keyman in Genting supporting and doing photo ops to boost their relationship with the Govt. Only time will tell..

2019-04-12 13:17

boostmy

Not really the case:

Dr Mahathir called Tan Sri Lim Goh Tong an “exemplary corporate citizen” who complied with regulations and policies and willingly supported the Govern-ment’s restructuring efforts and was still able to attain outstanding success.

https://www.thestar.com.my/news/nation/2007/10/24/lims-business-success-story-will-remain-unrivalled-for-years-to-come/#5zi6psed7e11a81G.99

2019-04-12 15:46

boostmy

Thanks

2019-04-12 15:53

wolfofWS

1) The 4.8bn tax is for the group and not just Malaysia operation. Hence your calculation and assumption on SST are also wrong

2) Can you break it down by country at least to estimate or support your theory?

2019-04-12 22:19

Jun Yu

Agreed. The 4.8bn tax is for the group and not just Malaysia operation.

2019-04-13 04:07

Jun Yu

boostmy maybe you can request the actual malaysia tax contribution data from IR by email...

2019-04-13 04:07

boostmy

Malaysia gaming ops is the largest contributor to gaming revenue. The gaming tax is lower at all other countries. Hence it should actually bring down the gaming tax rate. Already excluded income tax paid.

2019-04-13 16:14

wolfofWS

boostmy

Can you advise what is the rate in UK,US and the proportion of tax contribution in Malaysia, UK and US?

2019-04-15 21:33

smalltimer

Genting paid at least rm100m to govt during erection May 2018

2019-08-12 00:52

Post a Comment