SPToto reported 3Q22 core net profit of RM85.2m which came in above expectations due to higher-than-expected jackpot sales. We increase our earnings forecast by +14.8% for FY22 to account for the results shortfall in the current quarter. Maintain BUY with a slightly higher TP of RM2.43 (from RM2.40) based on DCF valuation with WACC of 7.4% and TG of 2%. We believe that the group will continue to record positive sales recovery in the NFO segment supported by the economy recovery as well as the increased confidence and interest in the legal NFOs. Furthermore, the robust sales in its luxury car dealership segment will continue to contribute positively to the group.

Above expectations. SPToto reported 3Q22 core net profit of RM85.2m (+41.4% QoQ, +2.4x YoY) bringing 9M22’s sum to RM133.6m (-21.6% YoY) forming 78.1% of ours and 91.1% of consensus’ expectations. We deem this above our expectation as the 9M22’s sum was dragged by the loss making 1Q22. The positive deviation was due to higher-than-expected jackpot sales. 9M22 core PATAMI sum was arrived after adjusting for RM18.4m of EIs mainly from provision for inventories write-down.

Dividend. 2 sen, ex-date: 29 Jun 2022 (3Q21: 1.5 sen). 9M22: 4 sen (9M21: 8 sen).

QoQ. Revenue increased by +38.8% lifted by both gaming (+38.2%) and motor dealership (+39.9%). Gaming revenue increase was due to stronger sales driven by the higher accumulated prize from Supreme 6/58 jackpot as well as a seasonally stronger season due to CNY, while the higher motor sales was due to better sales activities as a result of the easing of Covid restrictions which was implemented in previous quarter to curb the Omicron variant. Consequently, core PATAMI improved by +41.4%.

YoY. Revenue increased by +54% YoY lifted by both gaming (+70.3%) and motor dealership (+41.6%). Gaming revenue increased strongly due to (i) stronger jackpot sales; and (ii) lower sales in SPLY due to MCO2.0 where all outlets except Sarawak were closed during 13 Jan to 18 Feb. Motor dealership sales increase was due to lockdown implemented in UK SPLY from 5 Jan to 12 Apr 2021. Consequently, core PATAMI rebounded strongly by +2.4x due to low base as well as stronger contribution from gaming which has a better margin.

YTD. Revenue was flattish at +1.9% YoY contributed by motor dealership (+21.8%) while partially offset by gaming (-18.5%). The lower gaming contribution was due to loss of operating days from 1 June to 13 Sept 2021, where 9M22 only has 96 draws (vs. 129 draws SPLY). The increase in revenue from the motor dealership segment was mainly lifted by the used car segment sales. Core net profit declined by -21.3% due to lower contribution from the gaming segment which has a better margin.

Outlook. SPToto’s Supreme 6/58 jackpot amounting to RM97.8m (largest in history) was won on 30 Mar. The leading up to the record amount sum and the subsequent winning event had generated tremendous social media buzz and press coverage, which translated to increased interest in the game and lifted earnings in 3Q22. Although the record amount jackpot was a one-off event, nonetheless, the positive effects on SPToto’s NFO segment are here to stay. The jackpot should restore punters’ confidence in legal NFOs as the winning payout is guaranteed, while punters may be discouraged to bet with illegal NFOs due to high risk of payment failure of game winnings. In addition, the jackpot should also fuel the recovery momentum of the NFO segment going forward.

Forecast. We increase our earnings forecast by +14.8% for FY22 to account for the results surprise in the current quarter due to higher jackpot sales.

Maintain BUY; TP: RM2.43. Following our earnings adjustment our TP is increased slightly to RM2.43 (from RM2.40) based on DCF valuation with WACC of 7.4% and TG of 2%. We believe that the group will continue to record positive sales recovery in the NFO segment supported by the economy recovery as well as the increased confidence and interest in the legal NFOs. Furthermore, the robust sales in its luxury car dealership segment will continue to contribute positively to the group.

Source: Hong Leong Investment Bank Research - 24 May 2022