• Maintain BUY, with new DCF-based MYR2.10 TP from MYR2.23, 15% upside and c.7% FY23F (Jun) yield. We attended Sports Toto’s 4QFY22 results briefing, and came away feeling more cautious about its recovery moving forward, as illegal number forecast operators’ (NFOs) prevalence continues to hinder ticket sales recovery, and as HR Owen’s EBIT margin normalisation came earlier-than-expected. Despite lowering our estimates due to these challenges, we raise FY23F DPS to 12.5 sen, implying a 78% payout ratio, and yielding an attractive c.7%.

• Illegal NFOs preventing full recovery. We share management’s view that the illegal NFOs are a key part in the challenges preventing SPTOTO’s and other NFOs’ ticket sales from recovering to pre-pandemic levels. However, to weed out the illegal NFOs, there needs to be stricter legislations and stronger enforcements, in the presence of a stronger majority in the Government. According to management, foreign worker punters are not a significant contributor of its ticket sales and thus, their absence is not a hindrance to SPTOTO’s ticket sales recovery.

• Online gaming. While SPTOTO is ramping up online marketing to attract the younger crowd, we think that online gaming will be the key difference maker. Management is still in discussions with the Ministry of Finance (MOF) on the legalisation of online gaming. While we think this can bring MOF more tax revenue, the ministry’s ability to legalise online gaming heavily depends on political will.

• HR Owen’s EBIT margin QoQ softening to 2% from 4.4% reflects its normalisation to pre-pandemic levels. In 4QFY22, used luxury/super car ASPs softened as demand eased, due to i) recovery in new car production, and ii) lower spending on luxury goods. Management has pointed out that it does not foresee further cost pressures that could weaken margin. HR Owen’s Hatfield is expected to be commercialised in Mar 2023. We are not expecting a jump in sales volume, as HR Owen will be relocating some of its existing showrooms to Hatfield, which will negate the higher costs.

• Dividends. Should ticket sales recover to pre-pandemic levels, management thinks that pre-pandemic dividends (c.16 sen pa) is possible, but we think this is some distance away.

• Forecast. We trim FY23F-FY25F earnings by 13-8% as we lower our sales/draw assumption to reflect the slow recovery in ticket sales and the lower EBIT margin from HR Owen. However, we raise FY23F DPS to 12.5 sen from 11 sen, implying a 78% payout ratio (FY22: 73%). The downward revisions lowered our TP to MYR2.10, which includes a 0% ESG premium/discount. We maintain our BUY call on SPTOTO mainly for its attractive 7% yield. While still a distant possibility, some re-rating catalysts include: Stricter clamp down on illegal NFOs, and the legalisation of online gaming.

• Key risks include the reduction in the number of special draw days, another COVID-19 wave leading to outlet closures, changes in gaming tax, and the luck factor.

Source: RHB Research - 25 Aug 2022