• Keep BUY and MYR2.07 TP, 38% upside as we maintain our forecasts, pending today’s briefing, for greater clarity on Sports Toto’s outlook. While 1HFY23 (Jun) lottery results were above expectations, this was mainly due to a better-than-expected luck factor. Its UK motor dealership performed poorly, with softer revenue and deteriorating margins, weighed by higher interest and operating expenses. We highlight that the gaming outlet ban in Kedah will have a negligible impact. BUY for its FY24F 9% yield.

• Above expectations, due to luck factor. SPTOTO’s 2QFY23 core earnings of MYR65m brought 1HFY23 core earnings to MYR133m, making up 63% of our full-year forecasts and 58% of Street’s. The deviation from our forecast is mainly due to a lower-than-expected estimated prize payout in 1HFY23. Its second interim DPS of 2.5 sen brings 1HFY23 DPS to 4.5 sen – within our 10.5 sen full-year estimate.

• Marginal recovery in ticket sales. Although SPTOTO’s ticket sales inched up 8% QoQ, it remains at 85-90% of pre-pandemic levels, as illegal number forecast operators (NFO) continue to prevent a full recovery. Lottery operating profit fell 5% QoQ, as 2QFY23 saw a higher estimated prize payout of 59% (1QFY23: 57.2%).

• Rough roads ahead for HR Owen, as its 1HFY23 revenue made up only 44% of our FY23F estimate, and its operating profit only 26%. The soft revenue is likely a combination of softer demand, unfavourable FX, and continued supply tightness, which delayed some deliveries. Its operating margin fell to 0.4% from the pre-pandemic 2-3% due to high operating costs and higher interest expenses on stocking loans, driven by higher UK interest rates. Moving forward, we see further margin weakness, weighed by the Hatfield development’s forthcoming depreciation recognition.

• First Kedah, next Perlis? 3QFY23 will be the first quarter where Kedah’s ban on NFO outlets takes effect. We estimate the impact on earnings to be <2%, given Kedah’s minute contribution of c.2%. Management has indicated that punters have started visiting SPTOTO’s outlets in neighbouring states such as Penang, making up for the lost Kedah contribution. While Perlis’ state government is contemplating a similar ban on NFOs, we note that SPTOTO only has four outlets there, with negligible contribution to ticket sales.

• We keep our estimates for now, pending further clarity from today’s earnings briefing. We keep our BUY call and DCF-based MYR2.07 TP (0% ESG premium/discount), premised on its attractive c.9% FY24F yield. Key downside risks: Adverse regulations against NFOs, reduction in the number of special draw days, changes in gaming tax, and the luck factor.

Source: RHB Research - 22 Feb 2023