Kedah MB announced a ban on all NFOs in the state effective 1 Jan 2023. While this is a negative development, we believe the earnings impact from the outlets closure will be moderate as (i) the closure represents only 2.9% of SPToto’s total outlets; (ii) Kedah is predominantly Muslim populated; and (iii) the impact is cushioned by its growing luxury car dealership segment in the UK. Maintain forecasts and BUY call with an unchanged TP of RM2.27 based on DCF valuation with WACC of 9% and TG of 1.5%. The stock currently offers a generous dividend yield of 8.6%.

NEWSBREAK

NFOs will no longer be allowed to operate in Kedah effective 1 Jan 2023 following the state government’s decision not to renew the licenses of such premises.

HLIB’s VIEW

Negative development for the NFOs. Recall that on 14 Nov 2021, Kedah MB Sanusi had made a similar announcement not to renew NFOs’ business licenses. However, the decision was not followed through and NFOs licences were renewed until 31 Dec 2022. Nonetheless, this time around we believe that the decision will be executed given that the state and federal governments are now under different administrations, unlike previously.

Moderate earnings impact. We believe the earnings impact from the outlets closure will be moderate as (i) the closure represents only 2.9% of SPToto’s total outlets (20 out of 680 outlets); (ii) Kedah is predominantly Muslim populated; and (iii) the impact is cushioned by its growing luxury car dealership segment in the UK which contributed 32.1% of the group’s EBIT in FY22.

Risk of Perlis following suit but impact will be minimal. Post GE15, PN (in which PAS is a component party that holds the most seats) managed to form a new state government in Perlis – in addition to Kedah, Kelantan and Terengganu (the three did not hold state polls during GE15). For reference, SPToto has four outlets in Perlis (or 0.59% out of total 680 outlets), 20 outlets in Kedah (2.9%), none in Kelantan and Terengganu. As such, if Perlis were to follow suit, the impact would still be manageable given that Perlis only has four outlets.

Possibility of reallocation of outlets to other states. For NFOs, the business licenses are issued and governed by the state. However, the gaming licenses on the other hand are awarded by MoF. SPToto was allocated with a total of 680 licenses to operate NFOs. Following the closure of the 20 outlets, MoF could either allow SPToto to reallocate the 20 outlets to other states, while there is also a possibility that the 20 licenses may be revoked.

Forecast. As we expect the earnings impact to be minimal as explained above, we maintain our forecasts.

Maintain BUY with unchanged TP of RM2.27 based on DCF valuation with WACC of 9% and TG of 1.5%. Following a slew of negative announcements including (i) the recent reduction in special draws to eight (from 22); and (ii) the closure of Kedah NFO outlets, sentiment for the stock may be weak in the near term. Nonetheless, we expect both of the aforementioned events will have minimal impacts to earnings. The stock currently offers a generous dividend yield of 8.6%.

Source: Hong Leong Investment Bank Research - 3 Jan 2023