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This article first appeared in The Edge Malaysia Weekly on May 4, 2020 - May 10, 2020

WITH an end perhaps in sight for the Movement Control Order (MCO), some analysts suggest number forecast operators (NFOs) could be worth a look as the segment is expected to bounce back more quickly compared with others once the restrictions are lifted.

“It is a cash business. All they would need to do is to open their shutters and they are ready for business. The gaming sector is a consistent sector and habitual gamblers will resume their routines,” remarks Areca Capital CEO Danny Wong.

Moreover, NFOs are often seen as more able to withstand a recession than others — an important consideration given that a recession appears to be on the cards.

“When people are more worried about their income, the tendency for them to try out lotteries is higher. That is why the sector is seen as somewhat ‘recession-proof’,” says Wong.

An analysis of the sector by AllianceDBS Research on April 14 found the listed NFOs — Berjaya Sports Toto Bhd (BST) and Magnum Bhd — to be relatively resilient during the past two major financial crises.

The analysis calendarised BST’s financial performance to December for comparison purposes with Magnum’s. BST’s financial year ended in April 30 previously but was changed in 2019, to June 30.

The analysis showed BST’s gaming revenue grew 21% in 1997, 6% in 1998 and 4% in 1999. Meanwhile, Magnum saw 11% revenue growth in 1997, followed by a 4% contraction in 1998, and a larger contraction  of 7% in 1999.

During the more recent 2008/09 global financial crisis, BST reported gaming revenue growth of 6% and 11% in 2007 and 2008 respectively, while revenue contracted 2% in 2009.

Magnum’s revenue grew 2% in 2007, contracted 2% in 2008 and then rebounded 5% in 2009.

AllianceDBS observed that both NFOs had reported a “decent top-line performance” during the crises periods (relative to many other companies in general which saw much bigger revenue declines), which it said “illustrated the defensiveness and resilience of their respective business models during trying times”.

Nevertheless, it is a foregone conclusion that the NFOs will see lower earnings this year as they could not operate during the MCO, thus reducing the number of draws by 25, to 164 in 2020.

The consensus estimate of Magnum’s revenue this year is RM2.54 billion, 6.2% lower than a year ago while the average forecast earnings per share (EPS) is 15.8 sen compared with 16.8 sen in FY2019.

As for BST, the consensus estimate is revenue of RM5.76 billion and EPS of 16.8 sen. There are no comparative figures owing to the change in its financial year end in 2019.

For the 14-month consolidated period ended June 30, 2019, revenue came in at RM6.7 billion and EPS at 17.45 sen.

However, it is worth noting that many analysts’ revisions have not taken into consideration the most recent two-week MCO extension.

AllianceDBS Research estimates the extension to May 12 would result in an additional 5% reduction to the NFOs’ bottom line.

Nonetheless, Maybank Investment Research believes the NFOs would be more resilient than the casinos as they have lower overheads, which are just their licence fee and staff costs.

“It is the agents that bear most of the overheads needed to operate individual NFO outlets. In return, they receive a commission on the gross NFO sales,” says the research house in a report.

Areca’s Wong says the sector is worth considering now that valuations are low.

“It is a dividend stock and it is something investors can look at if they have an investment horizon of beyond one year. Yes, they will have to forego 10% to 15% of earnings this year but the stocks today are about 15% cheaper than they were previously,” he explains.

Year to date, Magnum’s share price has shed about 14% and BST, 11%.

Magnum’s share price fell to RM1.70 on March 19 at the start of the MCO but had rebounded to RM2.20 by last Thursday, valuing the company at RM3.13 billion.

Its price-earnings ratio is 13.11 times at current prices, and its dividend yield is 7.27%.

Over the same period, BST hit a low of RM2.09 and rebounded to RM2.32, valuing it at RM3.1 billion. It offers a dividend yield of 6.9%.

There are six “buy” calls on Magnum with an average target price of RM2.51 while BST has six “buys”, four “holds” and one “sell” with an average target price of RM2.48.

 

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