• Keep BUY and MYR2.10 TP, 31% upside, with 7% yield. 1QFY23 (Jun)’s results were in line, but DPS disappointed. We maintain our recommendation and TP, but highlight the significant downside risks if the political environment results in a spike in regulatory risks to the number forecast operators (NFOs). In such scenario, a higher risk premium is warranted to reflect Sports Toto’s heightened regulatory risks and uncertainties.

• Within expectations. SPTOTO enjoyed a favourable luck factor (low prize payout of c.57%) in 1QFY23. Hence, revenue made up 24% of our full-year estimate while the core net profit of MYR68m made up c.30% of our full- year forecast, which we consider to be in line, given that the prize payout may swing from quarter to quarter and the uncertainty in the trajectory of a full recovery in ticket sales. SPTOTO declared an interim DPS of 2 sen, which we deem to be below our full year 12.5 sen estimate, as management looks to preserve cash in light of the ongoing uncertainties. Accordingly, we lower our FY23F DPS to 10.5 sen.

• Ticket sales are still hovering at c.85% of pre-pandemic levels, as the illegal NFOs continue to prevent a full recovery. SPTOTO’s UK motor vehicle dealer – HR Owen – saw an 11% decline in revenue and 5% drop in EBIT. This was because changing consumer behaviour caused lower spending on used luxury vehicles and supercars, leading to discounts to clear its second-hand inventory. The EBIT margin of c.2% is the normalised level, and should sustain moving forward in our view.

• Heightened regulatory risks amidst political uncertainty. At the time of writing, the recently concluded 15th General Election resulted in a hung parliament. Depending on the makeup of the new Government, the shift in the political environment may result in a spike in regulatory risks that could involve additional restrictions on NFOs.

• Forecasts. We maintain our earnings estimates as the results were in line. Given that the political landscape remains inconclusive at the moment, we maintain our BUY call and DCF-based MYR2.10 TP – which includes a 0% ESG premium/discount – premised on an attractive FY23F yield of 7%. However, we highlight that if the political outcome turns unfavourable, we may significantly raise SPTOTO’s risk premium and WACC, presenting significant downside risks to the stock.

• Key downside risks include adverse regulations against the NFOs, the reduction in the number of special draw days, changes in the gaming tax, and the luck factor.

Source: RHB Research - 24 Nov 2022