• Keep NEUTRAL, new DCF-derived MYR1.69 TP from MYR1.55, 9% upside. Sports Toto’s 3QFY24 (Jun) earnings beat expectations, thanks to higher- than-expected sales during the festive season. Number forecast operators (NFOs) should see a high degree of defensiveness thanks to the decent yields and relatively inelastic demand. That said, we believe the current at-mean valuation is fair, considering the lack of exciting catalysts for the sector.

• Above expectations. 9MFY24 core net profit of MYR155m (-2.3% YoY) exceeded expectations at 89% and 81% of our and Street’s full-year estimates, primarily due to higher-than-expected sales in both the gaming and motor segments, driven by stronger seasonality. A third DPS of MYR0.03 was declared and will go ex on 27 Jun, bringing YTD DPS to MYR0.08 (1HFY23: MYR0.065), above expectations.

• Results review. YoY, 9MFY24 revenue rose slightly by 3.9% to MYR4.7bn, driven by higher gaming (+2.6%) and motor (+7.1%) segment revenue. 9MFY24 EBIT margin expanded by 0.4ppts to 6.1% on a lower gaming prize payout of 60.6% (9M23: 62.1%), despite being offset by higher operating costs from HR Owen. QoQ, 3QFY24 revenue rose 23.8% to MYR1.7bn, benefiting from favourable seasonality in the gaming and motor segments. Gaming ticket sales rose due to the Lunar New Year festive season, while motor revenue was boosted by the release of new vehicle registration plates in the UK. Consequently, 3QFY24 core net profit surged 193.7% QoQ to MYR78.5m.

• Outlook. Ticket sales for 4QFY24F are expected to decline following strong 3QFY24 sales (driven by the Lunar New Year period). Beyond the immediate term, illegal NFOs have gained and retained market share, particularly since the closure of legal NFO outlets in the northern states of Kedah and Perlis, leading to the proliferation of illegal operators in these underserved areas. Stricter legislation against illegal NFOs and the legalisation of online gaming could serve as key catalysts for the sector, though we believe these policies are not currently prioritised by the Government. HR Owen’s sales are also expected to decline after a seasonally strong 3QFY24, with margins likely to face continued pressure due to a higher operating cost environment.

• Forecast and ratings. Post results, we raise FY24-26F earnings by 14%, 10%, and 9% after incorporating a stronger sales assumption. Correspondingly, our DCF TP is lifted to MYR1.69 (inclusive of a 2% ESG premium), implying 10.9x FY25F P/E (close to its mean).

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

Source: RHB Research - 27 May 2024