Below are key takeaways from the analyst briefing:

1. Robust car sales in FY24;

2. Business as usual for NFO operations; and

3. Prudent cash flow management approach.

FY24 dividend will grow in tandem with profit. We raise our FY24-25 earnings projections by 1.3-4.2% but reduce FY24-25 dividend assumptions to 10-12sen/share. Accordingly, our DDM-derived target price is lowered to RM1.68/share. We downgrade SPToto to Hold as the recent price rally has fully reflected its resilient earnings quality and diminishing political risk post state elections.

Robust car sales in FY24

Management attributed the 20.4% growth in 4QFY23 earnings to additional sales of new and used cars from H.R. Owen. The increased car sales coupled with favourable forex movement have resulted in EBIT margin expansion to 3.5% from 2% in the same period last year. More importantly, management believes the growth is sustainable in FY24 due to completion of new multibrand showrooms in Hatfield Central in May-23 to house Bentley, Ferrari, Lamborghini and Maserati (Appendix). In addition, the new showrooms offer greater space for better car inventory management which is critical to reduce the overall waiting time.

On the cost fronts, we understand the inflationary pressure in London remains stiff with high staff wages, electricity and other operating costs. This is expected to persist in FY24 and management is confident that it can be mitigated by robust car sales in FY24.

Business as usual for NFO operations

It would be business as usual as election fears are behind us now. With regards to Budget 2024, management is hopeful that the government can impose stricter rules to eradicate illegal gambling. As far as online gaming or mobile betting, the industry players have to work on solutions to convince the government on how mobile betting would not attract and open up betting to Muslims before it can proceed to the next stage. BJToto is also in discussions with MoF about business reallocations from Kedah to other states but the progress would not be smooth sailing considering the market size and the impact to existing operators.

Prudent cash flow management approach. FY24 dividend will grow in tandem with profit

Management would remain prudent in cash flow dividend, citing that FY24 dividend will grow in tandem with the profit. However, we do not think the dividend payout would return to >80% levels in FY24 as the group’s net gearing has crept up to 84% in FY23 (Figure 1). As such, we reduce our overall dividend projections after trimming the payout ratio to 59-66% (from 87-95%) for FY24-25.

Source: TA Research - 25 Aug 2023