Results Review

• Sports Toto’s (SPToto) 1QFY24 core earnings of RM61.4mn came in within expectations at 27% of our full-year forecast and 29% of consensus estimates. For this quarter, the company declared a first interim share dividend on the basis of 1 treasury share for every 50 shares held, which is equivalent to approximately 3sen/share.

• SPToto’s 1QFY24 core earnings declined 17.2% YoY to RM61.4mn despite higher revenue of RM1.6bn, up 12.4%. The poor performance can be attributed to diminished luck factor versus low prize payout a year ago. In addition, the car franchising segment also reported weaker earnings YoY as the group started recognising finance cost instead of capitalising it post completion car showrooms in Hatfield Central.

• NFO. 1QFY24 NFO segment registered 7.2% YoY rise in revenue to RM752mn driven mainly by higher average sales per draw. However, the EBIT declined by 4.8% YoY due to higher prize payout. On QoQ comparison, the NFO segment recorded higher revenue and EBIT of 16.0% and 36.6% respectively.

• Car franchise. H.R. Owen’s 1QFY24 revenue expanded by 17.1% YoY to RM810.6mn on the back of improved sales of new and used cars, along with favourable forex movement. However, 1QFY24 EBIT declined by 33.8% as the group started charging interest cost to its profit. On QoQ comparison, the EBIT dropped by 69.8% due to lower car sales and higher interest and other operating costs.

Impact

• We lower our FY24-26 earnings projections by 7.2-14.7% on account for higher service tax starting 2024. We also reduce FY24-26 DPS to 9/10/12sen (from 10/12/14sen previously) following the earnings downgrade.

Outlook

• The proposed increase in service tax to 8% (from 6%) effective 2024 would likely be absorbed by SPToto given that any prize payout adjustment to alleviate the tax bite is not viable as it would proliferate illegal betting. As such, we expect the additional tax impact to be felt from 2HFY24 onwards, causing the NFO EBITDA to fall as much as 25.6% in FY24.

• A robust car franchising segment, i.e., H.R. Oven in London, would continue to be a silver lining as the completion of new multi-brand showrooms in Hatfield Central in May-23 is expected to improvement the inventory management to reduce new car waiting time. In FY24, we expect H.R. Owen’s revenue to be flat at RM3.05bn.

Valuation

• We cut SPToto’s DDM valuation to RM1.61 (from RM1.68 previously) based on unchanged CAPM rate of 13.6%. We maintain Hold recommendation on SPToto given its sustainable dividend yield at above 6%.

Source: TA Research - 22 Nov 2023