Sports Toto Berhad’s core businesses are: operation of Toto betting under Section 5 of the Pool Betting Act, 1967;motor retailing, repair & maintenance and provision of aftersales services; and development, manufacturing and distribution of computerized wagering and voting systems and provision of software licenses and support. In FY2022, out of 5.22billion revenue, toto betting contributed 2.14billon while motor vehicle dealership 3.01billion, while toto betting contributed 230million profit before tax, motor vehicle dealership 89million. From there, we can know that the majority of profit before tax of toto was contributed by toto betting. The company net income was dropping significantly in 2020 due to Covid 19 and closure of shops. The lower revenue in this financial year under review was due to the COVID-19 pandemic which resulted in cancellation of 40 draws during the Movement Control Order (“MCO”) period which commenced from 18 March2020 to 16 June 2020. In conjunction with lower revenue, net income was dropping during the corresponding period. (Source: annual report 2020)

What are the main factors that affect the profitability of this business? The key factors (other than general economic conditions) affecting the performance of the operations of the core business in the Group are disposable income of the general public,Jackpot cycles, luck factor, illegal gaming operations and the number of draws in the current year whilst auto retailing business is affected by the trend as well as supply chain in prestige and specialist cars in the UnitedKingdom. (Source: Q2 2023 quarterly report). From this statement, we can determine that the government policy and luck are important to the betting business, the prize payout and number of draws and affect this business significantly. Although the motor vehicle dealership business is not the business that generates the majority of net income, the profit before tax has increased from 25million in 2017 to 89million in 2022. In the latest quarterly report, H.R. Owen reported a 73.0% drop inpre-tax profit to RM10.9 million from RM40.1 million recorded in the previous year corresponding period. This was mainly due to the first half of previous year benefitted from the exceptional performance of the used car sector arising from the supply shortage in the new car market as well as government relief received in last year.

Over the years, the company has at least about dividend payout of 60%. Therefore, the company earnings have strong correlation with the dividend issued in the future. The dividend yield is about 6%, is it attractive given the current rising interest rate climate? Will the government allow to have more special draw numbers to increase the operators’ revenue? The government has cut special draw numbers in 2023. The motor vehicle dealership in the UK is affected by higher interest rate, operating cost wages. Do you think that the company can increase net income and hence dividend? Also, the company has about 1 billion borrowings, is it really attractive at the current rising interest rate scenario? The pe ratio is about 12, is it attractive to given the mature industry of betting industry in Malaysia?

Disclaimer: This information is intended for educational purposes only. It shall not be understood or construed as, financial advice. It is very important to do your own analysis before making any decision

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Raymond Lim, CFA