SPToto reported FY22 core net profit RM189m (-8% YoY) which is within ours but exceeded consensus’ full year forecasts. The group declared cash dividend of 3 sen per share and share dividend of 1 treasury share per 120 ordinary shares, bringing total FY22 dividend to 8.7 sen. As the stock is viewed as a dividend counter, the higher payout this quarter should restore investor’s confidence of a normalized payout level moving forward. We are projecting an attractive FY23 dividend yield of 7.7%. Maintain BUY with an unchanged TP of RM2.43 based on DCF valuation with WACC of 7.4% and TG of 2%.

Within ours but exceeded consensus. SPToto reported 4Q22 core net profit of RM55.4m (-35% QoQ, +58.7% YoY) bringing FY22’s sum to RM189m (-8% YoY). The results was within ours (96.2%) but exceed consensus (110.6%) expectations. FY22 core PATAMI was arrived after adjusting for net EIs of +RM27.4m mainly from provision for inventories write-down (RM23.7m) per share.

Dividend. Declared fourth interim cash dividend of 3 sen per share, ex-date: 3 Oct 2022. Additionally, the group also declared distribution of share dividend of 1 treasury share for every 120 ordinary shares, ex- date: 3 Oct 2022. Based on the treasury shares book cost of RM22.6m (equivalent to approximately RM2.03 per share), the share dividend is equivalent to approximately 1.7 sen per share. Hence, the total fourth interim dividend would be equivalent to 4.7 sen per share, bringing FY22 total dividend to 8.7 sen per share (vs. 4Q21: none, FY21: 8 sen).

QoQ. Revenue declined by -15.5% dragged by both gaming (-18.4%) and motor dealership (-13.5%) segments. Gaming decline was due to a higher base in previous quarter arising from (i) stronger sales driven by the higher accumulated prize from Supreme 6/58 jackpot; and (ii) seasonally stronger season due to CNY. Motor dealership decline was due to a higher base in previous quarter arising from (i) clearing of backlog orders accumulated due to supply shortage earlier; and (ii) seasonally stronger number plate changing month in Mar. Consequently, core PATAMI declined by -35%.

YoY. Revenue increased by +29.6% driven by improvement in both gaming (+47.8%) and motor dealership (+17%) segments. Gaming improvement was due to more draws conducted in the quarter (42 draws vs. 28 draws SPLY) as there were outlets closure last year due to MCO3.0. Higher motor dealership revenue was due to better sales volume as there were supply shortage issues SPLY. Consequently, core PATAMI increased by +58.7%.

FY22. Revenue increased by +8.4% contributed by motor dealership (+20.5%) but partially offset by gaming (-5.3%). Gaming decline was due to loss of operating days from 1 June to 13 Sept 2021 during MCO3.0, where FY22 only has 138 draws (vs. 157 draws SPLY). Motor dealership sales increase was due to lockdown implemented in UK from 5 Jan to 12 Apr 2021 which negatively impacted sales in previous financial year. Despite the revenue increase, core net profit declined by -8% due to (i) the decline in gaming which has a better margin; and (ii) higher effective tax rate of 37.3% (vs. 33.2% SPLY).

Outlook. Dividend declaration this quarter was higher than our expectation and as such, we believe dividend payout has normalized and expect FY23 dividend payout to be between 3-4 sen per quarter. Gaming revenue this quarter has recovered to c.85% compared to pre-Covid level in CY19. We believe NFO sales recovery will sustain supported by (i) increased in mobility as the country enters in to the endemic phase and as people gradually return to work in office; and (ii) the strong economic recovery (1H22 GDP growth +8.9% YoY) and low unemployment rate (3.8% in June 2022) which should bolster for the return of punters. We also highlight that SPToto’s Supreme 6/58 jackpot prize is creeping up again and currently stands at RM27.7m. Note that it only took 70 draws to accumulate to the current amount this time (vs. 93 draws in previous run) due to the increased popularity in the game. As the jackpot snowballs to a bigger amount, each draw will attract a higher amount of sales compared to the previous draw.

Forecast. No Change.

Maintain BUY with an unchanged TP of RM2.43 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 economic 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. As the stock is viewed as a dividend counter, the higher dividend payout this quarter should restore investor’s confidence of a normalized dividend payout level moving forward. We are projecting an attractive FY23 dividend yield of 7.7%.

Source: Hong Leong Investment Bank Research - 24 Aug 2022