• Keep NEUTRAL, with new DCF-derived MYR1.55 TP from MYR1.60, 2% upside. Sports Toto's 1HFY24 (Jun) earnings fell short of expectations, attributed to higher-than-average gaming prize payout and higher-than- expected operating costs from HR Owen. With 2QFY24 ticket sales at 87% of pre-pandemic levels (2QFY23: 93%), the path to sales recovery may not be straightforward due to the illegal number forecast operators’ (NFOs) strong market share. However, the stock offers an attractive yield of c.7%.

• Below expectations. 1HFY24 core earnings of MYR84.5m (-38% YoY) came in below expectations, at 42.4% and 39.2% of ours and the Street’s full-year estimates. The negative deviation was due to higher-than-average prize payout resulting from a sizable jackpot payout during the quarter, coupled with higher-than-expected operating costs from HR Owen. That said, the second DPS of 2 sen was declared and will go ex on 27 Mar – bringing YTD DPS to 5 sen (1HFY23: 4.5sen), within expectations.

• Results review. YoY, 1HFY24 revenue rose 4.8% to MYR3bn on stronger motor (+10.1%) segment revenue, while gaming (+0.2%) revenue remained flattish. Despite fewer draw days (1HFY24: 84 vs 1HFY23: 94), the gaming segment achieved higher sales per draw driven by higher accumulated jackpot prizes (Figure 3). Meanwhile, the higher motor revenue is attributed to new car sales contributions from the Hatfield showroom and favourable FX. However, 1HFY24 EBIT margin shrank 1.6ppts to 5.6% due to higher operating costs from both segments. QoQ, 2QFY24 revenue dipped 14.2%, dragged by both gaming (-5.7%) and motor (-21.4%) segments, due to lower accumulated jackpot prizes and fewer cars sold. Together with a higher prize payout of 62% (1QFY24: 60%) and higher operating costs from HR Owen, core earnings dipped 60.3% QoQ to MYR24m.

• Outlook. 3QFY24F sales are expected to pick up due to favourable seasonality, driven by the Lunar New Year period, despite the sales & service tax (SST) hike taking effect on 1 Mar – increasing the tax burden for the NFOs. Beyond the immediate term, management noted that illegal NFOs are gaining significant market share from two northern states, which are underserved following the closure of legal NFOs outlets. Meanwhile, HR Owen continues to face challenges from high inflation and interest rates in the UK. With higher depreciation and interest expenses from its newly launched Hatfield showroom, we believe HR Owen's margins will continue to remain under pressure.

• Forecast and ratings. Post results, we cut our FY24-26F earnings by 13%, 9%, and 7%. Correspondingly, our DCF-derived TP is lowered to MYR1.55 (inclusive of a 2% ESG premium), implying 11x FY25F P/E (close to its mean).

• Key downside risks include unfavourable luck factor and policies, and softer- than-expected ticket sales. The converse represents upside risks.

Source: RHB Research - 26 Feb 2024