Under the current market volatility with an increasing risk of recession, SPToto stands out thanks to its stable earnings profile supported by its resilient business segments. Both of its business segments, NFO and luxury car dealership are relatively resilient under a recessionary environment. In addition, we believe that the group’s dividend payout should normalize in FY23 supported by (i) recovery in NFO business; (ii) absence of Prosperity Tax; and (iii) absence of major capex. We are estimating FY23 DPS of 14 sen, translating to an attractive yield of 8.2%. Maintain BUY with an unchanged TP of RM2.43 based on DCF valuation with WACC of 7.4% and TG of 2%.

Dividend normalizing in FY23. Recall that during MCO3.0/Phase 1, SPToto’s operations were closed from 1 June to 13 Sept 2021, which resulted in the group’s operating cash flow taking a hit as it continued to incur fixed cost during the closure period. Consequent to this, the group had a lower dividend payout with 9MFY22 DPS totalling 4 sen as the group recuperated from its bruised balance sheet. Nonetheless, in 4QFY22, the group paid DPS of 4.7 sen, bringing total FY22 to 8.7 sen (72.1% payout). In FY23, management hopes to achieve payout ratio of >75%. We believe that the group would be able to pay DPS of 3-4 sen per quarter supported by (i) recovery in NFO business; (ii) absence of Prosperity Tax; and (iii) absence of major capex. We are estimating FY23 DPS of 14 sen, translating to an attractive yield of 8.2%.

Illegal NFO continues to be the biggest threat to the legal NFO with the former’s market size estimated to be roughly twice the size of the latter. The illegal operators leveraged on the closure of NFOs during MCO to grow thei r operations online and offered 4D games in other countries such as Singapore and Cambodia. The estimated tax revenue loss for the government due to illegal operators is about RM5bn annually. There are 2 ways to curb the illegal gambling, which are (i) introducing more punitive laws to illegal operators and buyers as well as tighter law enforcement; and (ii) levelling the playing field by allowing legal NFOs to operate online.

Online gaming. The legal NFOs, including SPToto, are in active discussions with the MOF to allow them to go online. We believe the MOF is well aware of the tax revenue loss to the illegal operators and as such, going online will be an imminent path for the legal NFOs in due time.

Flight to safety. There is an increasing risk of global recession in 2023, which may have a contagion effect on Malaysia through trade links. We see that the market is also increasingly pricing in this risk as the bellwether index KLCI is -10.8% YTD despite the strong economic recovery of +6.9% YoY GDP growth in 1H22. For investors who are looking to position their portfolio to mitigate recession risk, we note that SPToto’s business segments are relatively resilient to this. While lottery betting is a form of discretionary spending and it is counterintuitive that the segment will stay resilient during recessionary periods, we note that in the past recessions (AFC in 1998 and GFC in 2008), there were minimal impact to NFO business sales volume. Covid recession in 2020, however, was an exception due to closure of NFOs during that period. A study by Gambling Research Exchange Ontario (GREO) in 2017 could perhaps shed some light on this anomaly, where it found that people who experienced financial difficulties during recession are more likely to buy lottery tickets than those who did not. This is likely due to the perception that lottery tickets provide punters who face financial distress the possibility of winning a large jackpot with a low entry price (min RM1 for SPToto). Separately, its luxury car dealership segment is also similarly resilient to recession due to its wealthy customer base who are (i) less price sensitive; and (ii) better positioned to weather through a recession.

Forecast. Unchanged.

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 under the current market volatility with an increasing risk of recession, the stock stands out due to its stable earnings profile supported by its resilient business segments. Furthermore, we expect a higher level of dividend payout in FY23 compared to FY22 supported by (i) recovery in NFO business (no more closures); (ii) absence of Prosperity Tax; and (iii) absence of major capex. We are projecting an attractive FY23 dividend yield of 8.2%.

Source: Hong Leong Investment Bank Research - 4 Oct 2022