In its research note, it said the SST hike was an “unexpected setback for the gaming industry”.

RHB Research said it was trimming its FY2024F-25F earnings forecast for Magnum Bhd and Sports Toto Bhd by 4-5% with the assumption the NFOs absorb all the incremental cost without increasing the ticket price nor lowering the prize payout.

Analysts Tai Yu Jie and Lee Meng Horng said the 2% increase in SST represents 1-2% of gross sales as the net payable service tax is net of gaming tax, pool betting duty and payout.

They added the NFOs have been absorbing these taxes since the implementation of the goods and services tax (GST) in 2015 and also the SST following its re-implementation in 2018.

“We think the ticket sales and dividend recovery have been priced in, and the sector lacks re-rating catalysts to bring earnings and valuations to new heights.

RHB Research said while ticket sales are gradually improving and inching closer to pre-pandemic levels, it believes the current sector valuation is fair and the market has already priced in the recovery in ticket sales.

“While the NFOs are eagerly awaiting stricter legislation against illegal NFOs and the legalisation of online gaming, we believe such policies are not on the top of the government’s list for now.

“As for the ban of outlets in Kedah, we understand the NFOs are still in talks with both the federal and state governments in search of remedies (e.g. relocation) to the current situation,” Tai and Lee said.

However, the research house said despite these challenges, NFOs are offering dividend yields of 7%-8%.

The research house is maintaining its neutral call on Magnum but with a target price (TP) of RM1.14 and Sports Toto with a TP of RM1.55, marking a 4% upside for both.

At the time of writing, Magnum and Sports Toto were both unchanged at RM1.10 and RM1.49 with a market value of RM1.58 billion and RM2.01 billion respectively.