MALAYSIA

Genting Malaysia seeks cost cuts to offset tax upsets

Genting Malaysia has been forced into cost-cutting mode to offset the negative impact of recent tax rulings, which are expected to take a major toll on earnings.

In addition to an unexpected tax hike in last year’s budget, the company also recently dropped an appeal against changes to a tax incentive scheme to develop its Genting Integrated Tourism Plan (GITP), which will lead to higher tax rates for the group.

Chairman Tan Sri Lim Kok Thay has taken the lead, saying he will take a 20 percent pay cut to mitigate the impact of the tax increases.

Last year Tan Sri was paid MYR93.5 million and the reduction will save the company MYR18.7 million, according to Maybank analyst Samuel Yin Shao Yang. The savings would be MYR12.4 million if he takes that cut to his cash earnings, without bonuses.

“Either way, the cost savings to GENM will be less than 1 percent of our FY19E core net profit estimate,” he said in a note.

“As much as Tan Sri’s move sits well with the investment community, it is unlikely to move the hypothetical needle,” he adds.

Finance Minister Lim Guan Eng said in his budget last year that annual fees for casino licenses will be increased to 150 million ringgit ($36 million) from 120 million ringgit. Duties on casino gross income will rise to 35 percent from 25 percent previously.

The tax hikes, which were double the level analysts had been expecting, triggered a series of rating downgrades for Genting Malaysia.

Fitch Ratings estimated Genting is likely to see a decline of around 8 percent to 9 percent in group earnings before interest, tax, depreciation, amortization and rent/restructuring costs (EBITDAR) as a result of the tax hikes, though potential cost savings may offset the impact on the group’s financial profile.

For Q1, the group reported a decline in net profit of 26 percent to RM253.1 million. The operator said the decline was due to an overall lower volume of business in its gaming segment, largely due to lower incentives offered to customers.

The group reported revenue of RM 1.9 billion while adjusted EBITDA was at RM555.6 million.

Genting said EBITDA was supported by lower marketing expenses for the mid to premium player business, as well as lower payroll and related expenses due to a reduction in the number of employees. However, this was offset by higher casino duties.

The group’s earnings were also impacted by a provision for contract termination related costs of RM198.3 million in relation to the outdoor theme park at RWG.

Analysts had been patiently waiting for Genting’s Q1 results to determine the extent of the impact of the tax hike which came into effect in January. Analysts said that cost control will be key to wading through difficult times.

“In Malaysia, the Group will continue to review its capital expenditure requirements and rationalize its operating cost structure to mitigate the impact of the hike in casino duties and the increasingly challenging operating environment,” it said.

“Additionally, the Group will focus on leveraging the new assets to grow key business segments. To this end, the group will place emphasis on intensifying database marketing efforts to optimize yield management, as well as improving service delivery and operational efficiencies at RWG to enhance the overall guest experience.”

Still, the decision to withdraw its application for a judicial review against the Ministry of Finance’s (MOF) decision to amend a tax incentive in December 2017 is a further blow on top of the budget hikes.

In 2014, Malaysia’s Ministry of Finance gave its approval to Genting Malaysia’s application for tax incentives for the GITP redevelopment project, which allowed the group to claim income tax exemption equivalent to 100 percent of qualifying capital expenditure incurred for a period of 10 years.

However, the MoF amended the tax incentive scheme in December 2017, prolonging the utilization period of the tax allowances “significantly.”

Dropping the appeal will likely see Genting suffer from higher corporate tax rates in the near future and will probably result in Phase 2 of the GITP being put on hold indefinitely, analysts say.

Police continue illegal gambling crackdown

Malaysian police are continuing their crackdown on illegal gambling, arresting 14,759 individuals and seizing RM3.8 million ($917,000) in cash and 10,361 pieces of equipment from January to end June, local media reports.

Bukit Aman Criminal Investigation Department director Datuk Huzir Mohamed said 8,775 illegal gambling premises were raided between January 1 and June 22, with 92 operators arrested.

Police also identified 160 gambling syndicates believed to be actively operating in Selangor, Kedah, Penang and Pahang.

Police are working with the local authorities and the Malaysian Communications and Multimedia Commission to cut off utility services and block gambling websites, adding that MCMC have been asked to block 1,270 websites.

RGB eyes overseas expansion

Gaming supplier RGB International is looking to expand its gaming machine concession business overseas, despite putting its capitalraising plan on hold.

The company had earlier planned to spin off its gaming machine leasing unit in Hong Kong. “We need to wait for a conducive environment to implement our initial public offering plans in Hong Kong,” said group managing director Datuk Chuah Kim Seah in an interview with StarBiz.

Despite the setback, the company has reportedly allocated US$20 million to secure new machines for its concession programme this year. In 2018, the budget was US$25 million.

The company said it is planning to install additional 1,770 gaming machines across Asia, most of which will go to the Philippines market

. In Cambodia, RGB is set to install another 280 machines, and another 100 is set for Timor Leste, said Chuah.