Result Review

• Sports Toto’s (SPToto) 9MFY24 core earnings of RM159.5mn came in within our expectation but below consensus estimates, accounting for 75% and 86% of ours and consensus’ full-year forecast respectively. For this quarter, the company announced a third interim dividend of 3sen/share, bringing the YTD cumulative cash and stock dividends to 8sen/share.

• Excluding total RM2.8bn reversals of impairment on receivable and inventories, SPToto’s 9MFY24 core profit expanded by 6.2% YoY on the back of 4% rise in revenue. The satisfactory performance was due to robust recovery in 4D lottery sales that more than offset margin compression on H.R. Owen’s car sales.

• NFO. 9MFY24 revenue/draw increased significantly to RM17.8mn which was 10% higher than the preceding year corresponding period. We attribute this decent performance to the snowballed jackpot amount of RM64mn, which was struck recently in early-May. The rise in revenue/draw has resulted in margin expansion of 2.1%-pts to 12.5% for 9MFY24.

• Car franchise. H.R. Owen’s 9MFY24 revenue rose 7.1% YoY to RM2.3bn on the back of improved sales of new and used cars, along with favourable forex movement. However, the EBIT declined by 24.7% due to recognition of additional interest cost post completion of new car showrooms in Hatfield Central.

Impact

• No change to our FY24-26 earnings projections. Briefing highlights

• SPToto’s decent performance for 9MFY24 has eased our concern over the impact of additional 2% service tax on the company’s future earnings. The margin expansion of 9%-pts on lottery sales in 3QFY24 serves as a good indication that the additional 2% service tax can be outweighed by robust growth in lottery sales.

• The adoption of asset ownership model by H.R. Owen has resulted in increased operating leverage stemming from additional depreciation and other fixed costs. This would cause persistent margin pressure until it achieves the economies of scale.

Valuation

• We maintain SPToto’s DDM valuation to RM1.61/share based on unchanged CAPM rate of 13.6%. We upgrade SPToto to Hold (from sell previously) after the recent price weakness.

Source: TA Research - 27 May 2024