• Keep BUY, MYR2.39 TP, 26% upside, 7% FY23F (Jun) yield. We recently checked in with management and continue to like Sports Toto for its attractive yields, sales recovery, and HR Owen upside. Efforts on stricter clampdowns against illegal gambling and a broad economic recovery could drive ticket sales. This report marks the transfer of coverage to Jim Lim.

• The journey to pre-pandemic ticket sales. While BST ticket sales recovered to c.85% of pre-pandemic levels in 2QFY22, management indicated that the post-FMCO recovery (Jun-Sep 2021) has been slower than in previous recoveries, attributing it to punters' weaker economic conditions. Ticket sales in the coming quarters will likely remain at 85-90% of pre-pandemic levels. That said, we gathered that recent sales may have been higher at c.90%, partially fuelled by the prolonged Supreme 6/58 Jackpot run before the historic prize of c.MYR98m was struck. Positively, the gradual easing of restrictions and return of tourists – especially from Singapore – and foreign workers should lift ticket sales, particularly in Johor.

• Favourable regulations may help recovery and beyond. Should there be stricter clamp down against illegal gambling, ticket sales may swiftly recover to pre-pandemic levels. Recall that ticket sales were seen to improve in 2019 for the first time in many years, mainly driven by stricter enforcement against illegal gambling. The Government also recently considered legalising online gambling, which management views positively. We think it will boost BST ticket sales by making ticket purchases more convenient and tapping into previously unreachable digitally savvy punters. Online channels may also drive cost savings and improve profitability.

• The HR Owen business is cruising along nicely. There have been strong sales of new and used cars, but the former is seeing long lead times on chips and parts shortages, driving consumer demand for readily available used cars instead. EBIT margins of 3-4% remain higher than pre- pandemic's 1-2% on higher vehicle turnovers and a shorter inventory period lowers depreciation costs. Current margins should last in the coming quarters, given the tight supply of new vehicles. BST has ruled out the near- term spinoff of HR Owen, as it still sees a lot of value in the business.

• We keep our earnings forecasts but reduce FY22F-23F DPS to 8-14 sen from 9-16 sen to reflect the gradual recovery, which our earnings estimates accounted for. In our view, another lockdown is highly unlikely, hence, another dividend payment miss can be ruled out. We retain our DCF-based MYR2.39 TP with zero ESG discount/premium, as its ESG score of 3.0 is in line with the country median. Valuations wise, 6x FY23F EV/EBITDA is attractive relative to its 5-year mean of 10x. Still BUY for the sturdy Toto business, ticket sales recovery, and attractive 7% yield. Key risks include gaming taxes/regulations changes and another COVID-19 wave.

Source: RHB Research - 6 Apr 2022