• Keep NEUTRAL, new MYR1.60 TP (from MYR1.69), 2% upside, c.6% FY25F (Jun) yield. Sports Toto’s 1QFY25 earnings missed expectations due to lower-than-expected sales in the gaming segment – attributed to a lower jackpot prize – and its motor segment, which was affected by the soft UK economy. While the stock lacks catalysts to drive earnings and valuations, it offers a high degree of defensiveness thanks to its decent yields and relatively inelastic demand from punters.

• Below expectations. 1QFY25 core earnings of MYR41.3m (-31.6% YoY) came in below expectations at 18-19% of our and consensus’ full-year estimates. The negative deviation was due to lower-than-expected sales from both the gaming and motor segments. A first interim dividend of MYR0.02 was declared and will go ex on 30 Dec (1QFY24: MYR0.03), below expectations.

• Results review.YoY, 1QFY25 sales dipped 9.5% to MYR1.4bn, dragged down by both the gaming (-9.5%) and motor (-8.3%) segments. The decline in gaming sales was due to lower average sales per draw (-7.2%) following smaller accumulated jackpot prizes (Figure 3), despite a slightly lower prize payout of 60% (1QFY24: 60.4%). Lower motor revenue was due to reduced sales volumes amid soft economic conditions in the UK and unfavourable FX. 1QFY25 EBIT margin contracted by 1ppt to 5.5%, reflecting higher operating costs for both segments. QoQ, 1QFY25 revenue fell 12.5% due to the aforementioned factors. Along with a higher prize payout of 60% (4QFY24: 58.6%) and increased operating costs at HR Owen, core earnings fell 36.9% QoQ to MYR41.3m.

• Outlook. Competition from illegal number forecast operators (NFOs) is expected to persist due to the lack of strict enforcement and regulatory policies. Management is awaiting the decision on an appeal by licensed NFOs to restart operations in Kedah. A favourable outcome could help licensed operators reclaim market share from illegal players and discourage other states from arbitrarily closing licensed NFO outlets. Meanwhile, HR Owen is anticipated to face continued headwinds from soft economic conditions, elevated inflation, and high interest rates in the UK. Nonetheless, SPTOTO primarily funds its dividends via its lottery operations. Hence, the challenges at HR Owen are unlikely to significantly impact dividend payouts.

• Forecasts and ratings. Post results, we cut FY25-27F earnings by 14.1%, 13.8% and 13.4% after incorporating softer sales assumptions. Correspondingly, our DCF TP is lowered to MYR1.60 (inclusive of a 2% ESG premium), implying 11x FY25F P/E (close to its mean).

• Downside risks: Unfavourable luck factor and policies, and softer-thanexpected ticket sales. The opposite would represent upside risks.

Source: RHB Securities Research - 21 Nov 2024