NFO sales are recovering post lockdown but at a slower pace compared to post-MCO1.0. Separately, we estimate that the NFO ban in Kedah will have a moderate impact on the group’s earnings, while there is a possibility for the group to reallocate its Kedah licenses to other states. BToto’s luxury car dealership segment continues to record robust growth which should help to cushion the impact of a slower recovery in the NFO segment. We believe that most of the negatives have been priced in as share price is currently trading at -17.9% discount to the average price in 2019 (pre-Covid price level). The stock currently provides a decent dividend yield of 4.7% based on our projected DPS of 9 sen for FY22. Maintain BUY with an unchanged TP of RM2.26.

NFO ban in Kedah. Kedah’s MB had on 14 Nov announced that it will ban all NFOs in the state. Based on our assessment, this will result in a moderate c.2.7% reduction in earnings for BToto for FY22. Other than Kedah, BToto does not have any outlets in the two other states under the PAS administration (Kelantan and Terengganu), thus, we do not foresee any immediate downside risk for further ban of NFO outlets. On the other hand, for the 20 NFO licenses that BToto holds for Kedah, there is an upside potential that it can reallocate these licenses to more strategic locations in other states (which it has done before), but this will largely depend on the outcome of BToto’s discussion and negotiation with MOF.

Tepid recovery for the NFO segment. BToto’s NFO outlets were closed since 1 June 2021 and resumed operations on 14 Sept 2021. In its 1Q22 results, ticket sales per draw only recovered to 59.5% compared to SPLY due to (i) stricter SOPs in the outlets (only vaccinated individuals are allowed entrance); (ii) slower pick up rate during initial resumption of operations; and (iii) its Sarawak outlets (representing 6.6% of its total outlets) only opened on 1 Oct. From what we gathered, the recovery for BToto’s NFO segment currently is hovering at around c.70-75% of pre-Covid levels (vs.c.80-85% post-MCO1.0). We believe that the prolonged shutdown of NFOs (3.5 months) had further aggravated the shift of betting towards the illegal operators as punters were not able to place their bets through the legal NFOs during this period, resulting in a decline in market share for the legal NFOs. We opine that the recovery of the NFO segment is unlikely to recover to pre-Covid levels in the near term due to (i) lower visitation from the working adults (as a result of hybrid / WFH arrangements); and (ii) stiff competition from illegal NFOs.

Encouraging sales in the luxury car segment. BToto’s luxury car dealership segment continues to record robust growth aided by the pick-up in demand from high net worth individuals as they spend more on luxury goods given that they were not able to spend on traveling due to travel restrictions. This segment recorded its highest operating profit in FY21 (since it was acquired in 2014) despite a 4 months closure during the financial year. The segment has now grown to be a significant earnings contributor for the group (22.2% of operating profit in FY21) which should help to cushion the impact of a slower recovery in the NFO segment. Furthermore, the group is expanding to a new site in Hatfield, UK with a size of 5.4 acres (or roughly the size of 5 football fields) (Figure #1). The new site is more centralized compared to its current sites in London which are distributed around different parts of London. This new site will house HR Owen’s HQ office, multi-brand showrooms and aftersales centres (Figure #2). A total of GBP42m (or c.RM235m) capex is budgeted for this expansion with RM73m spent in FY21.

Forecast. Unchanged.

Maintain BUY, TP: RM2.26. While we note that the recent ban on Kedah NFO outlets as well as the slower recovery for the NFO segment had dampened the sentiment on the stock, we believe that these factors have largely been priced in by the market as share price is currently trading at -17.9% discount to the average price in 2019 (pre Covid price level). Following the share price weakness (-21.4% YTD), the stock currently provides a decent dividend yield of 4.7% based on our projected DPS of 9 sen for FY22. Furthermore, the strong growth in the luxury car dealership segment would be able to cushion the near term weakness in its NFO segment.

Source: Hong Leong Investment Bank Research - 8 Dec 2021