Results Review

• Sports Toto’s (SPToto) 1HFY24 core earnings of RM90.5mn accounted for 42.8% of our full-year estimates and 41.4% of consensus forecast. However, we consider this as within expectation as lottery sales are expected to be strong during the Lunar Chinese New Year (CNY). Also, the wealth effect from the rally in Europe’s stock markets would bode well for H.R. Owen’s 2HFY24 sales.

• The second interim dividend is reduced to 2sen/share (vs 2.5sen in 2QFY23) after the company declared a share dividend of 3sen for 1QFY24.

• SPToto’s 1HFY24 core earnings declined 30.9% YoY to RM90.5mn despite 4% rise in revenue to RM3.0bn. The poor performance was due to interest rate hikes in UK while the group stopped capitalising interest expense post completion car showrooms in Hatfield Central. Note that 1HFY24 interest expense rose 44% YoY to RM50.2mn.

• NFO. 1HFY24 NFO revenue was flat YoY at RM1.5mn despite 10 lesser draws. Revenue per draw was relatively strong at RM17.4mn, up 12.1% YoY, as the snowballing RM30.8mn jackpot amount for Supreme Toto 6/58 game has stimulated sales. However, the EBIT declined 10.5% YoY due to higher prize payout in 2QFY24.

• Car franchise. H.R. Owen’s 1HFY24 revenue expanded by 10.1% YoY to RM1.4bn on the back of improved sales of new and used cars, along with favourable forex movement. However, EBIT declined by 83.1% as the group started charging interest cost to its profit.

Impact

• No change to our FY24-26 earnings projections.

Briefing highlights

• NFO sales during Lunar CNY were strong and returned to pre-Covid levels, according to management. The sale momentum is expected to remain elevated thanks to the humungous RM30mn jackpot. With regards to 2% rise in service tax, we understand that industry players would likely absorb the additional cost.
• The adoption of asset ownership model has resulted in H.R. Oven’s operating leverage to rise due to additional depreciation and other fixed costs. This has caused margin compression in 2QFY24 when the quarterly sales dropped to RM637.3mn, below the norm of ~RM800mn. However, we expect sales to rebound in 2HFY24 due to the wealth effect from stock market rally.

Valuation

• We maintain SPToto’s DDM valuation to RM1.61/share based on unchanged CAPM rate of 13.6%. We downgrade the stock to Sell (from Hold previously) as the return has diminished to below 7%.

Source: TA Research - 26 Feb 2024