SPTOTO’s FY22 results missed our forecast due to weaker than-expected earnings from its luxury car distributor HR Owen but met market expectation. Its NFO ticket sales already hit 80% of pre-pandemic levels. We expect earnings momentum to accelerate into FY23 as ticket sales recover further to 89% of pre-pandemic levels. We cut our FY23F net profit forecast by 8%, lower our TP by 9% to RM2.13 (from RM2.33) (WACC: 6.0%; TG: 2%) but maintain OUTPERFORM. Its dividend yield is attractive at c.9%.

FY22 earnings missed our forecast by 11% but met market expectation. The variance against our forecast came largely from lower-than-expected earnings from its UK-based luxury car distributor HR Owen and a higher-than-expected effective tax rate. It declared a total dividend of 4.5 sen (3.0 sen and 1.5 sen share distribution of 1-for-120 treasury share) (ex-date: 3 Oct; payment date: 21 Oct), totalling FY22 total dividend to 8.5 sen which is higher than the 8.0 sen in FY21.

FY22 revenue rose 8% driven by despite lower draw days of 138 from 157 due to lockdowns. However, average ticket sales per draw rose 8% to RM16.9m (80% of pre-pandemic levels). 4QFY22 ticket sales eased (-16% QoQ, 82% of pre-pandemic levels) after the bumper preceding quarter on a jackpot run (+45%, 97% of pre-pandemic levels). On the other hand, HR Owen’s car sales remained strong until 4QFY22.

Cut FY23F earnings by 8% solely to adjust for lower earnings from HR Owen but keep NFO forecast unchanged which we expect ticket sales to recover to 89% of pre-COVID-19 level. Separately, we introduce new FY24 profit forecasts with earnings set to grow 5% as we expect ticket sales to recover to 94% of pre-pandemic level. Our NDPS forecasts are based on unchanged 80% payout.

Maintain OP for earnings recovery. 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 for its attractive dividend yield of around 9%. Meanwhile, we realigned SPTOTO’s risk-free rate with peer MAGNUM (MP; TP: RM1.59) which raised its WACC to 6.0% from 5.7% with unchanged TG of 2%, and reduce our TP to RM2.13 from RM2.33. There is no adjustment to our TP based on ESG for which it is given a 3- star rating as appraised by us.

Risks to our recommendation: (i) non-renewal of licenses, (ii) unfavourable prize payout ratios, (iii) weak consumer spending amidst high inflation, and (iv) products perceived to be socially undesirable.

Source: Kenanga Research - 24 Aug 2022