We expect minimal earnings impact on SPTOTO due to reduced special draws for 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. Nonetheless, we cut our FY23/FY24 earnings forecasts by 3%/5%. Buy with a TP of RM1.93. We like this high dividend yielding stock of >9% supported by the recovery of ticket sales.

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.

However earnings impact is less significant because: (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.

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.

While we are mildly negative pertaining to the special draw cut and outlets closure in Kedah as the net impact could be insignificant, we are 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 and enforcement crackdown on illegal operators should hasten recovery.

Source: Rakuten Research - 12 Jan 2023