- Keep BUY, with new MYR1.75 TP from MYR2.07, 15% upside. Sports Toto is awaiting the Kedah state elections to determine the fate of its 19 non- operating outlets, which will remain in limbo until 1HFY24 (Jun). Its UK luxury motor dealership HR Owen will likely face poor margins in the foreseeable future, exacerbated by incremental depreciation and interest expenses after the Hatfield site launch in 1HFY24. Despite the challenges, dividend payout recovery is on track. BUY for its FY24F 7% yield, as the recent sell-down has presented deep value.
- Holding onto Kedah, for now. While we think SPTOTO could turn adversity into opportunity by relocating their 19 Kedah outlets to other higher-ticket- sales states, the company prefers to try and remain in the state for its existing customers and business partners. Although it is in discussions with the Finance Ministry to relocate to other states, it is waiting to see if the political tide changes in Kedah’s next state election in 2Q/3Q23. We highlight that Kedah’s punters have been visiting SPTOTO outlets in neighbouring states, thereby cushioning sales.
- In a tough spot. HR Owen’s operating margin fell significantly to 0.4% (from the 2-3% norm) due to high energy costs, wages (due to inflation), and stocking borrowing costs (due to higher UK interest rates). As HR Owen is unable to lift car prices (determined by brand owners), it is in a tough spot to absorb the higher distribution costs. With its Hatfield site set to be launched in 1HFY24, we see risk of further margin compression, as interest expenses for Hatfield’s development can no longer be capitalised. Therefore, we trim HR Owen’s earnings, mainly on lower operating margins (<1% in FY23F- 24F). While we estimate incremental quarterly depreciation costs of MYR6m (Figure 1) and higher interest expenses from Hatfield in FY24, we foresee increased sales volume from: i) Recovering supply chain issues, and ii) higher allocation from brand owners, due to Hatfield’s bigger site, which could help prevent operating losses in FY24.
- Forecasts. We trim FY23F-25F earnings by 9-11% after: i) Aforesaid adjustments, and ii) assuming closure of 19 outlets for the entire 2HFY23.
- Dividends from SPTOTO are mainly from Toto, and therefore HR Owen’s struggles should not impact the dividend payout ratio (DPR). YTD DPR of 46% is gradually recovering towards the pre-pandemic 80-100%. As long as near-term regulatory uncertainties are present, SPTOTO is unlikely to return to >80% DPR. We trim FY23F-24F DPS to 10-10.5 sen from 10.5-13 sen.
- Lower DCF-based MYR1.75 TP (0% ESG adjustment), after increasing WACC to 9.4% from 8.8% (assuming 0.5% TG) for higher regulatory risks. BUY for its c.7% FY24F yield. We think value has emerged post sell-down, as the stock is now trading at an attractive FY24F P/E of 10.5x and EV/EBITDA of 5.6x (vs its 5-year mean of 12.3x and 9x,), which we think has more than priced in heightened regulatory risks. Key risks: Adverse regulations, reduction of special draw days, changes in gaming tax, and the luck factor.
Source: RHB Research - 23 Feb 2023