Thursday 28 Mar 2024
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KUALA LUMPUR (Dec 6): Putrajaya’s decision to cut special draws to eight per year is expected to see minimal impact on earnings of number forecast operators (NFOs), specifically for Sports Toto Bhd, analysts observed.  

Analysts said this is especially true when special draws fetch lower margins, as higher taxes are imposed on them. 

After a special Cabinet meeting on Monday (Dec 5), Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim said that the number of special draws by NFOs will be reverted to just eight per year starting from Jan 1, 2023 — like in 2019 when the Pakatan Harapan government ruled — from the present 22, as part of the Government’s move to carry out its duties transparently, without heavily relying on what he dubbed as 'wang haram' (illicit or illegal money). 

Hong Leong Investment Bank Research analyst Tan Kai Shuen in a note on Tuesday said that despite the reduction in the number of special draws, he expects minimal impact on Sports Toto's earnings due to special draws typically having lower sales compared to normal draws due to their “non-routine” nature.  

Additionally, a portion of special draw sales cannibalises sales from normal draws, which have a higher margin, resulting in a net negative impact on earnings.

“We are not overly concerned about this development, as special draws have minimal impact on NFOs’ earnings.

“Firstly, special draws typically have lower sales compared to normal draws because of their non-routine nature. Punters typically prefer to play routine normal draws on Wednesday, Saturday and Sunday, while special draws are held on selected Tuesdays as prescribed by the Ministry of Finance.

“Secondly, a portion of special draw sales cannibalises sales from normal draws. Recall that special draws have higher tax than normal draws, which results in a net negative impact on earnings from this portion of sales that is cannibalised,” he said.  

Tan maintained his "buy" call, with an unchanged target price (TP) of RM2.27 on Sports Toto, based on discounted cash flow valuation, with weighted average cost of capital of 9% and terminal growth of 1.5%.  

“As we expect the earnings impact to be minimal, we believe the current knee-jerk reaction and weakness in share price present a good opportunity to accumulate. At the RM1.60 closing price, our projected yield for FY2023 (the financial year ending June 30, 2023) is generous at 8.8%,” added Tan. 

As at 10.58am on Tuesday, Sports Toto’s share price was up three sen or 1.88% at RM1.63, bringing the group a market capitalisation of RM2.2 billion.  

RHB Research analysts Jim Lim Khai Xhiang and Lee Meng Horng, who also maintained their "buy" call but with a lower TP of RM2.07 from RM2.10 previously for Sports Toto, viewed that though special draws tend to fetch lower margins, the lower number of days will also crimp earnings.

Besides expectations of lower earnings, which are already priced in, they highlighted that there was no significant improvement in Sports Toto's earnings for the first quarter ended Sept 30, 2022 (1QFY2023), despite an increase in the number of special draw days at end-May.  

Sports Toto started off FY2023 on the right foot, as it recorded RM71.5 million in net profit for 1QFY2023 — a turnaround from RM17.67 million in net loss posted for the same period last year. A first interim dividend of two sen per share was also declared, with the ex-date on Dec 29 and the entitlement date on Dec 30. 

The good performance was mainly due to improved results reported by its NFO business STM Lottery Sdn Bhd, and supported by the group’s luxury car dealer HR Owen plc. STM Lottery was formerly known as Sports Toto Malaysia Sdn Bhd. 

Sports Toto’s revenue for the quarter climbed 77.93% to RM1.42 billion from RM797.57 million a year ago, driven by STM Lottery’s revenue increase of 844.7%, due to the higher number of draws conducted at 46, compared with only eight draws in the previous year’s corresponding quarter. 

“Special draws tend to fetch lower margins versus normal draws, as NFOs have to pay an additional 10% as a special contribution to the Government from all special draw gross ticket sales. Historically, previous administrations have turned to special draws to shore up their coffers.  

“[As such], we cut our FY2023-25 earnings forecasts by 3% per annum but maintain our call. Despite the heightened regulatory uncertainties and risks, there is still a possibility that the Government may tighten enforcement against illegal NFOs to compensate for lower tax revenue. 

“While we recognise that regulatory uncertainties and risks remain, we do not rule out the possibility of favourable policies in the future, which is the potential ramp-up in enforcement efforts against illegal NFOs,” wrote Lim and Lee in a note on Tuesday. 

They made no change to their "buy" rating, premised on Sports Toto’s “handsome” 7% dividend yield.

Edited ByIsabelle Francis
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