SPTOTO’s 1HFY23 results topped forecasts, driven by higher than-expected investment-related and associate income, as well as lower minority interest. In addition, 2QFY23 ticket sales have already returned to 82% of the pre-pandemic level and projected by us to hit 90% in FY24. Hence, we raise our FY23-24F net profit by 6% each, lift our TP marginally to RM1.95 (from RM1.93) and maintain our OUTPERFORM call.

1HFY23 net profit of RM136.3m beat expectations, making up 53% and 59% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from: (i) higher-than-expected investment-related income, (ii) higher-than expected share of associate incomes, and (iii) lower-than-expected minority interest. Meanwhile, it declared 2nd interim NDPS of 2.5 sen (ex-date: 04 Apr; payment date: 21 Apr) tallying 1HFY23 NDPS to 4.5 sen which is higher than the 2.0 sen paid in 1HFY22.

QoQ, 2QFY23 net profit fell 9% to RM64.9m while revenue slid slightly by 1% to RM1.41b. This was largely due to: (i) unfavourable luck factor with higher estimated prize payout ratio (EPPR) of 63.3%, from 61.7% in 1QFY23, leading to a 5% decline in NFO operating profit while (ii) its luxurious car distributor HR Owen (HRO)’s operating profit plunged 82% to RM2.7m as sales dropped for both new and used cars. The decline in topline, led by lower HRO car sales, was offset by higher NFO sales (+8%) on higher draw days of 48 from 46 while average ticket sales per draw rose 3% to RM17.1m per draw, which was still within the targeted recovery rate of 80%-85% of pre-pandemic levels, at 82%.

YoY, 1HFY23 net profit almost quadrupled to RM136.4m from RM35.6m in 1HFY22 as revenue surged 38% as during 1QFY22, the MCO 3.0 nationwide lockdown resulted the cancelation of 37 draws. In total, 1HFY23 played 94 draws vs. 53 draws in 1HFY22. Meanwhile, HRO reported lower operating profit by 61% owing to the weakening of GBP against MYR as well as higher operating and interest costs (due to interest rate hike).

Forecasts. We raise FY23-FY24F earnings by 6% each to reflect the investment-related and share of associate income, but lower minority interest. Similarly, we raise our NDPS in accordance with the same payout ratio of 80%. We continue to like this high dividend yielding stock which is supported by the recovery of ticket sales, making it a good stock for income seekers for its attractive dividend yield of >10%. Post earnings revision, our DCF-driven TP is increased slightly to RM1.95 from RM1.93 on unchanged WACC of 7.4% and TG of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5). Maintain OUTPERFORM.

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 - 22 Feb 2023