• Stay NEUTRAL, with new DCF-derived MYR1.60 TP from MYR1.55, 8% upside. Sports Toto’s 1QFY24 (Jun) earnings beat expectations, thanks to higher-than-expected sales. While ticket sales are recovering closer to prepandemic levels, we think the current valuation (close to the mean) is fair, and the sector lacks re-rating catalysts for earnings and valuation to reach new highs. Nonetheless, the stock offers an attractive c.7% yield.

• Beat expectations. SPTOTO’s 1QFY24 core net profit of MYR60.5m exceeded expectations, at 33% and 28% of ours and Street’s full-year estimates, primarily due to higher-than-expected sales from Toto operations. The company declared a share dividend distribution on the basis of one treasury share for every 50 existing ordinary shares held – translating to c.3 sen per share, in line with expectations.

• Results review. YoY, 1QFY24 revenue rose 12.4% to MYR1.6bn on higher gaming (+7.2%) and motor (+17.1%) segment revenues. The improvement in gaming revenue continued to gain pace, now at c.92% of pre-pandemic level (1QFY23: c.86%) – partly driven by higher accumulated jackpot prizes (Figure 3). Meanwhile, the jump in motor revenue is attributed to new car sales contribution from Hatfield showroom. However, 1QFY24 EBIT margin shrank 1ppt to 7.8%. Gaming segment contracted 4.8% YoY due to higher prize payout of 60% (1QFY23: 57%), while the motor segment was affected by higher operating expenses following the opening of a new showroom. QoQ, 1QFY24 revenue dropped 1.4%, dragged down by HR Owen (-11.4%) on lower car sales cushioned by recovery in sales from gaming (+16%) segment. This led to a dip in 1QFY24 core profit at MYR60.5m.

• Outlook. We think the illegal number forecast operators (NFOs), which gained and retained market share since the COVID-19 pandemic, are the main reason preventing full recovery of SPTOTO’s ticket sales. Additionally, the industry’s structural decline, attributed to the younger generation’s declining interest to purchase tickets, poses a long-term threat for the industry, in our view. Hence, stricter legislation against illegal NFOs and the legalisation of online gaming could serve as key catalysts for the sector. However, we believe such policies are not currently prioritised by the Government. Meanwhile, HR Owen’s margin may continue to face pressure due to higher operating cost environment, coupled with increased depreciation and interest expenses following the Hatfield showroom launch.

• Forecast and ratings. Post results, we lift our Street-low FY24-26F earnings by c.8% after imputing higher sales assumption. Correspondingly, our DCF-derived TP is lifted slightly to MYR1.60 (inclusive of a 2% ESG premium). Our TP implies 10.8x FY24F P/E (close to its mean), or at a slight discount to its closest peer Magnum (MAG MK, NEUTRAL, TP: MYR1.14) to account for its challenging operating environment in the UK (through HR Owen). Key downside risks include unfavourable luck factor, unfavourable policies, and softer-than-expected ticket sales. The converse represents the upside risks.

Source: RHB Securities Research - 22 Nov 2023