We expect minimal earnings impact on SPTOTO due to reduced special draws from 2023 and the closure of outlets in Kedah. This is because profits from special draws are inherently low due to an extra 10% tax while historically ticket sales in Kedah were also below that of the group’s average given the low non-Muslim population. We cut our FY23/FY24 earnings forecasts by 3%/5%, trim our TP slightly to RM1.93 (from RM1.95) and maintain our OUTPERFORM call.

Ticket sales to hit by special draws cut and outlet closure… Starting Jan 2023, NFO ticket sales are expected to be affected by: (i) the cut in special draws to eight times per year from 20-22 times previously, and (ii) the non-renewal of premise licenses for NFO outlets in the state of Kedah.

…but earnings impact is less significant. The reasons for the limited earnings impact are that: (i) the special draws come with an additional tax collection of 10% which reduce NFO’s profitability significantly as opposed to the usual regular draws while (ii) SPTOTO has only 19 outlets in Kedah which makes up less than three percent of the 680 outlets nationwide. In addition, we learnt that historically ticket sales in Kedah were less than the group’s average given the low non-Muslim population there. As such, the actual impact quantum would be less than the 3% outlets reduction.

Reduce FY23/FY24 estimates by 3%/5%. With this, we lowered our FY23 total draw day assumption to 170 from 176 and FY24’s to 164 from 176 previously as the special draws are cut to eight times from the previous assumption of 20 draws. We also trimmed FY23 ticket sales by 2% to account for the said outlets closure but keep FY24 ticket sales growth of 5%. This leads to our FY23/FY24 forecast cut by 3%/5% while NDPS is also cut proportionally based on unchanged 80% payout ratio. Post earnings revision, after updating the latest beta from Bloomberg and removing an additional 1% risk premium (imposed immediately after GE15 given the political instability), our DCF-derived valuation is reduced slightly to RM1.93 from RM1.95 as WACC is adjusted to 6.1% from 6.0% previously.

Improved economic conditions should help to spur ticket sales. While we are mildly negative pertaining to the special draw cut and outlets closure in Kedah as the net impact could be insignificant as mentioned above, we are in fact slightly more optimistic than the company guidance of ticket sales recovering to 80%-85% of pre pandemic levels at 87%/92% in FY23/FY24. We believe that as economic growth improves (to help consumers’ spending power) and enforcement crackdown on illegal operators should hasten recovery.

Maintain OUTPERFORM for earnings recovery. We continue to like this high dividend yielding stock which is supported by the recovery of ticket sales, making it as good avenue for income seekers for its attractive dividend yield of >9%. As such, we maintain our OUTPERFORM call on SPTOTO with a lower target price of RM1.93. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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

Source: Kenanga Research - 12 Jan 2023