NFO stocks offer buying opportunity on earning resilience


  • Corporate News
  • Tuesday, 14 Apr 2020

UOB Kay Hian Research, which maintained its “buy” call on the sector despite the recent extension of the movement control order (MCO), noted that NFO stocks now featured the highest dividend yield among companies listed on Bursa Malaysia.

PETALING JAYA: The earning resilience and high dividend yields of number forecast operators (NFOs), coupled with the recent fall in their share prices, make the stocks an appealing option for investors at the moment.

UOB Kay Hian Research, which maintained its “buy” call on the sector despite the recent extension of the movement control order (MCO), noted that NFO stocks now featured the highest dividend yield among companies listed on Bursa Malaysia.

The sector, it noted, offered sustainable yields of up to 7.4% from financial year 2021 (FY21) onwards.

“This quantum of high dividend yield is particularly attractive, given the sector’s earnings resilience and the capital market’s eventual hunger for high yielders, ” it said in a note.

It added that the depressed share prices of NFO stocks also presented a buying opportunity, given that Berjaya Sports Toto (BToto) and Magnum Bhd’s share prices have fallen some 15.4% and 20.2%, respectively, from their year-to-date peaks.

The fall in share prices were initially on the back of concerns about detrimental policy changes after the formation of the Perikatan Nasional coalition government, and later, the financial contagion impact of the Covid-19 pandemic.

“Nevertheless, we believe the shortfall in earnings is only short term and should not be misconstrued as investors’ falling confidence in NFO’s business resilience, ” it said.

The research house, which maintained its “overweight” stance on the gaming sector and NFO sub-sector, also sees the possibility of the government allowing NFOs to have more special draw days after the current MCO-related restrictions are lifted.

This, it believes, it possible given the government’s need to raise tax revenue.

The number of special draw days had previously been cut down to eight days from 22 in the two previous Budgets.

“If this materialises, the incremental profits to the NFO operators would not be significant. “Nevertheless, it would validate the NFO operators’ existence and importance to government revenues, ” the research house said.

On the flipside, it noted that owing to the MCO, the NFOs have suspended their operations to comply with the order, causing a loss of 19 draw days.

UOB Kay Hian research said it had cut FY20 and FY21 earnings forecasts by 16% and 7%, respectively, but expects swift recovery post-MCO.

“We expect earnings to normalise once the MCO is lifted, given the NFOs’ resilient earnings and inelastic consumer base, ” it said, noting that ticket sales were still intact before the MCO was implemented.

It said FY21 earnings, however, were reduced to factor in the long-term impact of the extended MCO on the economic and consumption recovery.

The research house prefers Magnum for its pure exposure to the segment with a longer-term potential catalyst of U-Mobile monetisation, and has maintained its “buy” call on both BToto and Magnum.

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