• Keep NEUTRAL and MYR1.69, 6% upside. Sports Toto’s FY24 (Jun) earnings beat expectations, thanks to higher-than-expected sales from both the gaming and motor businesses. While ticket sales continue to inch closer to pre-pandemic levels, we think SPTOTO’s current valuation (close to the mean) is fair, and the stock lacks re-rating catalysts for earnings and valuation to reach new highs. That said, it currently offers an attractive c.7% FY24F yield.

• FY24 core net profit of MYR220.5m (-0.2% YoY) exceeded expectations, at 111% and 109% of our and Street full-year estimates. This was primarily due to stronger-than-expected sales in both the gaming and motor segments. A fourth DPS of 2sen was declared and will go ex on 1 Oct, bringing its YTD DPS to 10sen (FY23: 9sen), ie within expectations.

• Results review. YoY, FY24 revenue rose 3.4% to MYR6.3bn, driven by higher gaming (+4.3%) and motor (+5%) revenue. Stronger gaming sales were attributed to higher sales per draw (+10.4%), driven by higher accumulated jackpot prizes, while the motor segment benefited from favourable FX rates. FY24 EBIT margin expanded by 0.4ppt to 6.2%, due to a lower gaming prize payout of 59.9% (9M23: 63.8%), partially offset by higher operating costs from HR Owen. QoQ, 4QFY24 sales dipped 2.6%, mainly due to lower gaming sales (-8.6%) resulting from a lower number of draw days (4QFY24: 41 vs 3QFY24: 42), partially offset by higher motor sales (+3.2%) which benefited from the delivery of certain high-demand new models. Consequently, 4QFY24 core net profit dropped by 7.1% QoQ to MYR65.5m.

• Outlook. Management indicates that competition from illegal number forecast operators (NFOs) remains rampant, particularly after the closure of legal outlets in Kedah and Perlis, with the absence of stricter enforcement and policy. However, if the recent appeal by NFOs to resume operations in Kedah is successful, this may enable it to claw back some market share from illegal operators, and prevent other states from arbitrarily closing NFO outlets at the same time. Meanwhile, HR Owen is still facing challenges from high inflation and interest rates in the UK. The increased depreciation and interest expenses from its newly launched Hatfield showroom are likely to keep its UK segment’s margins under pressure.

• Post results, we raise FY25-26F earnings by 9% each year, after incorporating a stronger sales assumption, and introduce FY27F earnings (+3%). We maintain our DCF-based TP of MYR1.69 (with a 2% ESG premium) after updating our CoE assumptions (now at 11.9% from 16% with a renewed beta input post housekeeping). Our TP implies 9.4x FY25F P/E, ie close to the mean.

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

Source: RHB Research - 26 Aug 2024