Sports Toto Bhd’s (Sports Toto) 3QFY23 net profit fell 70.8% YoY to RM23.2m  mainly due to lower contribution from both the gaming and motor distribution  business. STM Lottery posted a 69.4% drop in pretax profit on fewer number of  draws as well as higher prize payout while HR Owen was dragged by unfavourable  foreign exchange effect and lower profit margin. Although 9MFY23 results came in  within our expectation at 72% of full-year forecast, it was below market estimate at  69%. The upcoming state elections have created uncertainties as any changes in  the governments of Selangor, Penang or Negeri Sembilan will be viewed negatively  given the potential impact on the business of number forecasting operators (NFO). As inflationary pressures remain persistent and affect consumer spending, as well  as higher financing cost, we cut our FY23-25F earnings forecasts by an average of  18%. Consequently, our DCF-based TP is revised lower to RM1.40. Given limited  upside potential, we downgrade Sports Toto to Neutral. A third interim dividend of  2.0 sen per share was declared (3QFY22: 2.0 sen per share).

• 3QFY23 revenue dropped 4.2% YoY, attributable to weaker contribution  from STM Lottery and HR Owen. STM Lottery reported an 11% decline in  revenue due to fewer number of draws (41 versus 43 in 3QFY22) and the  absence of attractive jackpot game. Meanwhile, HR Owen was affected by  unfavourable foreign exchange translation.

• 3QFY23 net profit suffered 70.8% decline, mainly due to higher prize payout  and lower motor distribution margin, as operating and finance costs increased  on higher interest rates.

• Outlook. The overall sentiment on the number forecasting sector has been  adversely affected by policy changes since the 15th General Election. The  upcoming state elections have caused further uncertainties. Should there be  a change in the political landscape of the states of Selangor, Penang or Negeri  Sembilan, this could affect the operation of NFO (for example outlet closures,  reduction in the number of draws etc). Meanwhile, dividend yield is still  attractive at 7%, which we believe is sustainable given its cash balance of  ~RM600m (we assume a payout of 60% for FY23F, which equates to a total  dividend distribution of ~RM110m)

Source: PublicInvest Research - 24 May 2023