Sports Toto Bhd (Sports Toto) posted a 31.3% YoY decline in 1QFY25 net profit to RM41.3m, owing to a decline in both gaming and motor dealership revenue as well as higher tax cost. The results came in below market and our expectations, accounting for 18% of full-year estimates. However, we retain our earnings forecasts as we expect ticket sales to improve in the second and third quarters due to seasonality. A first interim dividend of 2sen per share was declared (1QFY24: 3sen per share). Maintain Neutral on Sports Toto.

• 1QFY25 revenue down 9.5% YoY. STM Lottery recorded a decline in revenue of 9.5% primarily due to fewer number of draws (40 versus 42 draws in 1QFY24) as well as lower average ticket sales per draw. In the previous year's corresponding quarter, ticket sales were boosted by higher accumulated lotto jackpot prizes. However, this impact was partially cushioned by lower prize payout. Meanwhile, motor dealership revenue fell 6.3% due to unfavourable foreign exchange effect and lower sales volume. New car sales were impacted by the product life cycle of car models, leading to the phasing out of certain old models. In addition, the overall consumer sentiment was weaker due to challenging economic conditions in the UK following the General Election held in July 2024.
• 1QFY25 net profit fell 31.3% YoY, in tandem with the decline in gaming revenue. Gaming profit typically accounts for ~90% of the group's operating profit. In the current quarter, motor dealership suffered a loss of RM5m compared to a profit of RM10m in 1QFY24. This was largely due to margin compression under a challenging operating environment in the UK. Meanwhile, the effective tax rate has increased from 32.1% in 1QFY24 to 40.8% as some expenses were not deductible for tax purposes.
• Outlook. Sports Toto's gaming operation is likely to remain stable. The prevalence of illegal gaming operations will continue to be a perennial issue, estimated at 2-3x the size of the legal industry's market share of around RM9bn a year. The only way to tackle and deter the growth of the illegal market is through stricter enforcement and penalties. Meanwhile, we expect new car sales to remain sluggish given the weak consumer sentiment as well as rising geopolitical tension in Europe.

Source: PublicInvest Research - 21 Nov 2024