BUY, new MYR2.07 TP from MYR2.10, 29% upside with c.7% FY23F (Jun) yield. Yesterday, the prime minister cut the number of special draw days for 2023 to eight, from 22. As special draws tend to fetch lower margins, this lower number of days will also crimp earnings. We cut FY23- 25F earnings by 3% pa, but maintain our call – despite the heightened regulatory uncertainties and risks, there is still a possibility that the Government may tighten enforcement against illegal number forecast operators (NFO) to compensate for the lower tax revenues.
Decrease in special draw days. Yesterday, the Prime Minister Datuk Seri Anwar Ibrahim announced that the number of special draw days allowed for 2023 has been decreased to eight, from 22. Earlier this year, in end-May, the Government had increased the number of special draw days to 22 days from 11 days. We have adjusted our assumptions to reflect eight special draw days a year into perpetuity.
Less special draw days = a smaller government revenue source. Special draws tend to fetch lower margins vs normal draws, as NFOs have to pay an additional 10% as a special contribution to the Government on all special draw gross ticket sales (after deducting the 8% gaming tax). Historically, previous administrations have turned to special draws to shore up their coffers.
Forecasts. To reflect the assumption of the decrease in the number of special draw days to eight (vs 22 previously) from 2023 onwards (into all future years), we also pare down Sports Toto's FY23-25F earnings by 3% each year.
Minor impact, still BUY. The earnings reduction only shaves down our DCF-based TP to MYR2.07 from MYR2.10. Our TP includes a 0% ESG premium/discount as per our in-house proprietary methodology, as SPTOTO’s ESG score is on par with the country median. We think the expectation of lower earnings is already in the price. We also highlight that, despite the increase in the number of special draw days in end-May, there was no significant improvement in SPTOTO's 1QFY23 earnings. We make no change to our BUY rating, premised on its handsome 7% dividend yield. While we recognise that regulatory uncertainty and risks remain, we do not rule out the possibility of favourable policies in the future, ie the potential ramp-up in enforcement efforts against illegal NFOs.
Key downside risks to our call include adverse regulatory changes against the NFOs, the reduction in the number of special draw days, negative effects of any change in gaming taxes, and a worsening luck factor.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....