The turnaround in 2QFY22 was highly expected given the resumption of business but the earnings were weaker than expected owing to the slower ticket sales recovery. Nonetheless, as the current ticket sales are nudging closer to pre-MCO 3.0 lockdown levels, we expect recovery to revert to 80%-85% of pre-COVID levels in 2HFY22 before full recovery in FY23. We continue to rate the stock an OP with a revised TP of RM2.22 for its above average dividend yields.

2QFY22 below expectation with net profit of RM53.3m bringing 1HFY22 net income to RM35.6m which accounted for 19% of our forecast as ticket sales recovery was slower than expected but met consensus at 24%. The recovery of NFO ticket sales post MCO 3.0 lockdown was slower than our estimate of 50%-60% initially before recovering to 70%-75% in 2QFY22. Meanwhile, it declared 2nd interim NDPS of 1.0 sen (ex-date: 30 Mar; 22 Apr), totalling YTD 1HFY22 to 2.0 sen against 6.5 sen paid in 1HFY21.

Turnaround sequentially as business resumed. 2QFY22 net profit of RM53.3m posted from net loss of RM12.4m in the preceding quarter as the resumption of business from 14 Sep 2021 boosted revenue up by 56%. There were 45 draws conducted in 2QFY22 from 8 draws previously while average ticket sales per draw rose to RM14.2m vs. RM10.1m previously. We estimated the prize payout ratio (EPPR) at 63.1% from 65.9%. Meanwhile, HR Owen (HRO) posted lower EBIT by 33% to RM18.3m as revenue fell 10% owing to lower car sales as the UK authority implemented restrictions due to the rising COVID cases there.

But the recovery was slower than expected. 2QFY21 net profit fell 18% YoY from RM65.1m, despite revenue rising slightly by 1%, as NFO earnings declined 26% owing to lower total ticket sales by 13% as the recovery was slow at 70%-75% vs. 80%-85% of pre-COVID levels previously. Thus, average ticket sales per draw contracted 19% from RM17.6m. The higher revenue was mainly attributable to higher car sales from HRO by 18%. YTD, 1HFY22 net profit plunged 73% to RM35.6m from RM132.9m solely due to the MCO 3.0 lockdown in 1QFY22 which saw its total ticket sales falling 50%. However, HRO reported higher operating profit by 26% on higher car sales coupled with favourable forex of converting GBP to MYR.

A better 2HFY22 as ticket sales are slowly back to pre-MCO 3.0 lockdown levels where the ticket sales were at c.80% of pre-COVID levels in Feb. With government authority quoted saying that the country will not go back to lockdown even as COVID cases are rising, we believe ticket sales is unlikely to see substantial decline. As such, upcoming results will only get better. Post-2QFY22 results, we trimmed our FY22 ticket assumption by 9% to RM16.0m per draw which led us to cut FY22 estimates by 13% while NDPS is also cut proportionally based on unchanged 80% payout. However, we keep our FY23 estimates unchanged.

Maintain OP for earnings recovery which supports its decent yield. We continue to like this high yielding stock which is supported by the recovery of ticket sales, making it a good avenue for income seekers. We expect ticket sales to pick up swiftly to 80-85% of pre- COVID level in 2HFY22 and a full recovery is expected in FY23. Post earnings revision, our DCF-derived TP is reduced slightly to RM2.22 from RM2.23. OP retained. Risks to our call include a slower-than- expected ticket sales recovery and unfavourable luck factor.

Source: Kenanga Research - 23 Feb 2022