• Still NEUTRAL with new MYR1.61 DCF-TP from MYR1.43, 6% upside. Sports Toto's 4QFY23 (Jun) results beat our expectations, mainly due to a non-recurring write back of relocation costs. Its 4QFY23 2.5 sen DPS came in-line, delivering a dividend payout ratio (DPR) of 56% in FY23. While its sales/draw recovers, HR Owen's margins will likely remain under pressure. We recommend holding the stock for its 7% FY24F yield.
• Exceeded our expectations. SPTOTO’s 4QFY23 (Jun) core net profit of MYR66m brought FY23 core earnings to MYR217m – exceeding our full year forecast by 13%, mainly driven by better-than-expected HR Owen results. It met Street's expectations at 102% of its full-year estimate. Its 4QFY23 DPS of 2.5 sen came in-line, bringing FY23 DPS to 9 sen.
• Lottery business. SPTOTO's lottery revenue in 4QFY23 stood at 79% of its pre-pandemic average, a reversal from 3QFY23's 89%. Revenue softened 11% QoQ against a seasonally stronger 3Q, thanks to the Lunar New Year. Despite this, operating profit jumped 137% due to lower prize payout ratio of 62% vs 3QFY23's 69%. YoY, its ticket sales per draw rose 2.2%. We understand that SPTOTO continues to work towards relocating its closed Kedah outlets to other states, which is slower-than-expected.

• HR Owen's revenue rose 6% and operating profit jumped 157% QoQ. Its operating margin jumped to 3.6% from 1.5%, mainly thanks to the write back of a provision made for relocation costs. Looking ahead, we think the challenges from high inflation and interest rates are likely to persist in the UK. With higher depreciation and interest expense from Hatfield, we believe HR Owen's margins would remain under pressure in FY24.

• Clearer skies = faster dividend recovery? In the three states (Selangor, Penang, and Negeri Sembilan) that house c.33% of SPTOTO's total outlets, the political status quo allows the company to operate business as usual – without the fear of outlet closures like in Kedah. We believe this diminished uncertainty reduces its need to hold cash and could lead to improved DPR – potentially expediting the normalisation of its DPS. Its DPR stood at 52% and 56% in 4QFY23 and FY23. With no further regulatory uncertainty in the near future, we think SPTOTO could lift it to 74-85% in FY24F-FY26F.

• We trim FY24F-FY25F earnings estimates by 2% on lower ticket sales per draw, given the slower-than-expected relocation of outlets from Kedah.

• We maintain our call, with a new MYR1.61 TP, including a 2% ESG premium. The higher TP is mainly due to a lower WACC, as we trimmed the Beta assumption to account for the improved regulatory environment. Despite lacklustre ticket sales recovery and continued challenges at HR Owen, we maintain our call as we think it is worth holding for its 7% dividend yield. Key downside risks include adverse regulations against the NFOs, changes in gaming tax, lower-than-expected contribution from HR Owen, disappointing dividends, and the luck factor. The opposite represents upside risks.

Source: RHB Securities Research - 24 Aug 2023