Kedah MB announced a ban on all 4D lottery shops in the state. The ban will be enforced immediately through all local councils by not issuing new premise licences and not renewing the existing business licenses. If the ban materializes, we estimate a moderate impact to the group’s earnings at c.2.7%. However, given the negative implications from the ban, we do not discount the possibility that the decision may be reversed. Pending more clarity on the ban as well as the upcoming results release, we maintain our forecasts and BUY call with an unchanged TP of RM2.40 based on a DCF valuation with WACC of 7.6% and TG of 2%. The stock offers a decent projected dividend yield of 5.0% in FY22.

NEWSBREAK

Kedah is set to ban all 4D lottery shops in the state. Kedah Menteri Besar Datuk Seri Muhammad Sanusi Md Nor said the ban will be enforced immediately through all local councils by not issuing new premise licences and not renewing the business licenses for gambling premises in the state. “This is to ensure a Kedah free of gambling, as we all know it has caused the collapse of family institutions and even civilisations, besides resulting in debt problems,” said the Kedah MB.

HLIB’s VIEW

Negative surprise for the NFOs. The Kedah MB cites social problems as the reason for the ban of NFOs in Kedah. We think that the move is counterproductive as the ban will only encourage the already rampant illegal betting operators to flourish as punters turn to other means to channel their bets. Furthermore, this will also reduce the tax revenue collection by the government. Note that BToto paid RM702.7m in tax, duties and contribution to the government in FY19 (pre-Covid). If the ban materializes, this will also have negative ramifications to the NFO or the gaming industry as a whole as it potentially opens the floodgate for other states to follow suit. Given the seemingly hasty announcement as well as the negative implications that will ensue if the ban materializes (as explained above), we do not discount that there may still be room for negotiations and that there is a chance that the decision may be reversed.

Assessing the impact. Kedah has 20 Btoto outlets, representing 2.9% of its 680 outlets in Malaysia. Thus, we expect the group’s betting segment revenue to reduce by a similar quantum, which translates to c.2.7% reduction in earnings. The earnings impact is quite moderate as (i) Kedah is predominantly occupied by Muslim and has only 2.9% of Btoto’s total outlets in Malaysia; and (ii) the impact is cushioned by its growing vehicle dealership segment in the UK which contributes 22.2% of the group’s operating profit in FY21.

Forecast. Pending more clarity on the ban as well as the upcoming results release on 18 Nov, we maintain our forecasts for now.

Maintain BUY with an unchanged TP of RM2.40 based on a DCF valuation with WACC of 7.6% and TG of 2%. We maintain our call and TP for now pending the upcoming results release. The stock offers a decent projected dividend yield of 5.0% in FY22.

Source: Hong Leong Investment Bank Research - 15 Nov 2021