PETALING JAYA: The move to stop renewals of business licences of 4D lottery shops in Kedah would have minimal impact on numbers forecast operators’ (NFOs) earnings, as long-term prospects are expected to remain stable.
According to UOB Kay Hian Research, the earnings impact on NFOs is estimated to be lower than 4% to 5% of net profit.
The research house reckoned that there are about 43 4D outlets in Kedah currently, including 20 Berjaya Sports Toto Bhd (BToto) stores, 11 Magnum Bhd’s Magnum 4D stores and 12 Da Ma Chai stores operated by Pan Malaysian Pools Sdn Bhd.
“Our channel checks also revealed that Kedah’s lottery sales usually make up about 2%-3% of the country’s total sales. Numerically, we deem that the earnings impact to the NFOs is about 4%-5% of net profit, but absolute impact might be lower as some of the sales will be re-channelled to the legal states,” it said in a report.
The brokerage noted that the development in Kedah does not come as a surprise, given that other PAS-led states in Malaysia including Kelantan and Terengganu have banned lottery sales previously.
However, it opined that this could fan illegal operators’ market share gain.
While there is not much clarity on the impact of the ban on existing NFO outlets in Kedah at the moment, CGS-CIMB Research expects possible closure of outlets, as their gaming licences would expire over the next 12 months.
It pointed out that Kedah accounts for 3.1% and 2.7% of BToto and Magnum’s total outlets respectively.
“We make no changes to our forecasts for the NFOs for now given the small earnings impact and pending further clarity on the ban,” the research house said.
However, CGS-CIMB expects NFOs’ earnings in the third quarter (Q3) to take a hit from the full movement control order (MCO).
“We estimate NFO sales plunged quarter-on-quarter (q-o-q) in Q3, given the 2.5-month closure during the full MCO versus only one month in Q2, before rebounding q-o-q in Q4 on full operations and NFO sales recovery. Thus, BToto and Magnum may book net losses in Q3 before returning to profitability in Q4.
“Given the expected losses in Q3 and based on Q2 (2021), we think both NFOs’ dividends may only resume in Q4. We see Magnum declaring 3.3 sen dividend per share in Q4 (95% payout for FY21) while BToto may pay 11.3 sen dividend per share (95% payout).”
Based on the expectations of full NFO sales recovery next year, CGS-CIMB is keeping its “overweight” call on the Malaysian gaming sector.
“We prefer Magnum over BToto, given the former’s pure NFO exposure and potential monetisation of its 8% stake in U Mobile,” it said.
Meanwhile, Maybank Investment Bank Research noted that the impact of the Prosperity Tax on earnings will be higher, albeit only for a year.
With long-term prospects still attractive, the brokerage advocates for investors to capitalise on any “knee jerk reaction” to share prices. It has maintained its “buy” calls on Magnum and BToto with target prices of RM2.35 and RM2.29, respectively.