• • Still NEUTRAL and DCF-derived MYR1.42 TP, 8% upside. Sports Toto’s 3QFY23 (Jun) core profit of MYR19m was as expected, but its Toto segment fell short while HR Owen outperformed. Its Toto business had a very unlucky quarter, with a prize payout ratio of 69% (vs long-term average of 60%). HR Owen’s margin improved QoQ but remains below pre- pandemic levels. We keep our call as the stock lacks catalysts, and we think its share price has priced in the near-term negatives.

• Below expectations. 9MFY23 core profit of MYR152m was within our (79%), but below Street (65%) full-year estimates. We highlight that its Toto segment fell short of our expectations, while HR Owen outperformed. Its 3QFY23 DPS of 2 sen brings YTD DPS to 6.5 sen – below expectations.

• Higher Toto sales/draw, but very unlucky quarter. Toto revenue fell 4% QoQ, mainly due to the lower number of draw days (41 vs 48). However, ticket sales/draw improved to MYR19m from MYR17m, showing continued ticket sales recovery. Toto’s operating profit fell 69% QoQ, largely due to high prize payout as the Supreme 6/58 first prize was struck twice in 3QFY23. Historically, the prize was struck once every three to four quarters. 3QFY23's high prize payout ratio of 69% brought YTD prize payout ratio to 61.6%, above its long-term average of c.60%.

• HR Owen's revenue rose 39% QoQ as it saw a higher number of vehicles sold, likely due to improved supply conditions. As a result, its operating profit jumped almost fourfold – achieving an operating margin of 1.5% during the quarter, which is still lower than pre-pandemic’s 2-3% level.

• Outlook. With ticket sales/draw almost at pre-pandemic levels, we expect it to return towards full recovery. On Kedah, SPTOTO is waiting to see if the political tide changes in the next state election in 2Q/3Q23. On HR Owen, we expect its operating margin to remain <2% due to elevated costs and higher depreciation costs from the launch of its Hatfield showroom.

• We maintain FY23F-25F, as our higher HR Owen margins assumption negates the higher Toto prize payout assumption for FY23F. We lower FY23F-25F DPS to 9-11 sen from 10-12.5 sen.

• Still NEUTRAL, with unchanged MYR1.42 TP. We maintain our WACC and TG assumptions of 10.8% and 0.5%, and 0% ESG adjustment. Our TP implies a 9.8x FY24F P/E, or at -1SD from its 5-year mean. It is trading at 9x forward P/E, slightly below our ascribed valuation. We maintain the NEUTRAL call as the stock price has priced in the near-term negatives. Its current 7% FY24F yield cushions downside risks. Historically, the stock offers 7-8% yields. Key upside/downside risks: Political landscape shifts, changes to government policies, and fluctuations in the luck factor.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 24 May 2023