Sports Toto Bhd’s (Sports Toto) 2QFY24 net profit was down 62.7% YoY to RM24.2m due to lower revenue and higher operating cost for both the gaming and motor dealership operations. Cumulative 1HFY24 results were below expectations, accounting for only 40% and 39% of our and consensus full-year estimates. We cut our FY24-26F earnings forecasts by 6-12% as we factor in a lower gaming profit and motor dealership margin due to higher operating cost for Hatfield Centre as well as higher finance cost. Maintain Neutral with a lower DCF-based TP of RM1.36. A second interim dividend of 2.0sen per share was declared (2QFY23: 2.5sen per share).

• 2QFY24 revenue fell 2.8% YoY. STM Lottery reported a 6.3% decline in revenue primarily due to fewer number of draws conducted i.e 42 draws versus 48 draws in 2QFY23. Meanwhile, HR Owen’s revenue dropped by 4.8% due to lower sales but this was offset by favourable exchange rate, leading to an overall improvement of 2.4%.

• 2QFY24 net profit declined by 62.7% YoY, mainly dragged by higher prize payout and operating cost for the gaming segment. Also, the motor dealership earnings was dragged by higher operating, depreciation and interest costs. Following the completion and full operation of the Hatfield Centre, depreciation charges have increased while the increase in interest rate has led to higher finance cost. As a result, this segment posted an operating loss of RM6.9m compared to a profit of RM2.7m in 2QFY23.

• Outlook. The legal numbers forecasting operator (NFO) business is seen as a matured industry with limited variation to its product offerings. As the operations are largely governed by authorities, it remains a challenge for NFO operators to introduce new games in order to compete with the illegal operators. Over the years, legal operators have been losing market share as the preferred mobile betting is prohibited under the Pool Betting Act 1967 while illegal operators are not subject to the same restrictions, leading to an uneven playing field. With the closure of outlets in the two northern states i.e Kedah and Perlis, illegal operators have now further encroached into these underserved areas, activities of which can be curtailed if amendments are made to current legislation.

Source: PublicInvest Research - 26 Feb 2024