KUALA LUMPUR (May 16): Maybank Investment Bank (Maybank IB) has downgraded Sports Toto Bhd to “sell” at RM1.39 with a lower target price (TP) of RM1.04 (from RM1.40) and said number forecast operator (NFO) outlets in Selangor, Penang and Negeri Sembilan account for 35% of Sports Toto’s total outlets.

In a note on Monday (May 15), Maybank IB analyst Samuel Yin Shao Yang said if these state governments change, his long-term earnings estimates for Sports Toto could be cut by 52%.

He said that relative to Magnum Bhd, Sports Toto has more NFO outlets in Selangor at 22% (Magnum: 18%).

“If just the Selangor state government change, our long-term earnings estimates could be cut by a still deep 33%.

“Raise WACC (weighted average cost of capital) to 11.1% from 9.2%, cut DCF-TP (discounted cash flow-based target price) by 26% to RM1.04 and downgrade Sports Toto to 'sell' from 'hold',” he said.

Yin said assuming average gross NFO sales/draws/outlets are uniform throughout the country and NFO outlets are shut on Jan 1, 2024 should state governments change, his long-term earnings estimates for Sports Toto could be cut by 52% if the Selangor, Penang and Negeri Sembilan state governments all change.

“To maintain our previous Beta of 0.8 times is to imply that we still believe that the NFO subsector is stable and defensive, which we increasingly believe is not.

“Therefore, we now assign a Beta of 1.1 times to derive a WACC of 11.1%. Net impact of the above is to cut our DCF-TP to RM1.04 from RM1.40,” he said.