KUCHING: Analysts continue to advocate investing in number forecast operators (NFOs) such as Magnum Bhd (Magnum) and Berjaya Sports Toto Bhd (Berjaya Sports Toto) for exposure to the gaming sector as they remain positive on the sector fundamentals and its exciting growth prospects.
Going into the year, AllianceDBS Research Sdn Bhd (AllianceDBS Research) maintained its bullish stance on NFOs since late 2018, supported by the intensified clamp down of illegal NFOs, has been fruitful so far with both listed NFOs giving recommendable returns exceeding 25 per cent in 2019 [ outperforming the FBM KLCI.
“Both NFOs have shown positive growth in their gaming revenue per outlet per draw since late 2018,” the research house said in a sector focus yesterday.
“Furthermore, we observe that the improving gaming revenue per outlet per draw is inversely correlated with the weaker Consumer Sentiment Index. This implies that the improvement is mainly driven by the shift of the punters from illegal to the legal NFOs market due to more stringent enforcement by the authorities in curbing the illegal NFO activities.”
The major catalyst for the NFOs continues to be the on-going crackdown on illegal NFO activities, affirmed AllianceDBS Research.
Although there are no official estimates of the illegal NFO’s market size, the research house understood that its market size remains large and estimated to be about twice the amount of the legalised NFO market despite the more stringent enforcement by the authorities in curbing illegal NFO activities since 2018.
“Therefore, we believe there is still plenty of room for the NFOs to grow their earnings if the authorities successfully reduce illegal NFO activities,” it said.
“For 2020, we do expect the clampdown on illegal NFOs to further intensify with the enforcement of minimum penalties for both sellers and punters part in the illegal NFO market, and potential sector liberalisation to attract punters back to the legal market.”
Meanwhile, the research house also believed that the market may have underappreciated the minimum penalties announced in Budget 2020.
“One of the key developments that could serve as a major deterrent to participating in the illegal NFO market is the imposition of punitive minimum penalties on both punters and sellers in the illegal market announced under Budget 2020, for which AllianceDBS Research believed the market may have underappreciated its impact.
“As highlighted in our previous report, we outlined that existing legislations governing the NFO sector in Malaysia are Pool Betting Act 1967, Lotteries Act 1952, and Common Gaming Houses Act 1953.
“Our review of these legislations indicates that the penalties imposed by these acts are inconsistent, overlapping and some of them may not be sufficiently punitive to deter illegal NFO activities.
“The government has effectively closed this loophole In Budget 2020 by proposing a higher minimum mandatory penalty of RM100,000 for punters patronising illegal gambling outfits, along with a minimum mandatory jail sentence of six months. For illegal operators, a higher minimum mandatory penalty of RM1m and a 12-month minimum mandatory jail sentence will be imposed.”
Given that the existing legislations do not cover the newly imposed minimum penalties, the authority will have to amend the legislations for inclusion of the new minimum penalties.
“We understand that the authority is planning to table the proposal to amend the present Acts in the first quarter of 2020,” it added.
“We anticipate minimal opposition for such amendments given that the objective is to wipe out the illegal NFO activities to protect public interests.
“We believe that such high penalties and long jail terms imposed on both punters and illegal operators, if enforced and marketed effectively, could greatly discourage both parties from participating in the illegal NFO market. This should improve the earnings prospects of the NFOs.”
Also, the potential further liberalisation of the NFO sector including the introduction of more game variants could be an added bonus for the NFOs, as these will not only attract punters to return to the legal market, but also could expand its customer base by attracting new customers with new game features.
“In conclusion, we are maintaining our overweight stance on the gaming sector. Our top pick for the sector is Berjaya Sports Toto, and we retain our buy recommendation for Magnum.”