Analysts remain positive on NFOs despite Kedah ban

KUALA LUMPUR: The Kedah state government's decision to ban the operations of numbers forecast operators (NFO) would weaken investor sentiment in the sector, although the impact would be minimal given the few outlets in the state.

Following the state government's decision not to renew the licences of NFO operators, they will no longer be allowed to operate in Kedah effective Jan 1, 2023.

CGS-CIMB Research said it expects the closure of the Kedah NFO outlets to dampen already weak investor sentiment in NFO stocks, at least over the near term, due to concerns over more severe crackdowns.

Sports Toto Bhd's outlets in the predominantly Muslim-populated state represent only 2.9% of its total outlets while Magnum Bhd only has 2.7% of its outlets in the state.

"We cut Sports Toto’s FY23F/24F/25F core earnings per share (EPS) by 2.1%/4.7%/4.7% after factoring in the loss of contribution from its Kedah outlets from January 2023 until further notice, and reduction in the number of special draws from 11 to eight per annum from 2023 onwards," it said in a note.

"Our discounted cash flow-based target price for Sports Toto falls 5% to RM1.90 following our earnings cuts," it said, while maintaining its "add" recommendation.

As for rival NFO operator Magnum, CGS-CIMB cut its FY23F and FY24F core EPS by 5.4% and 5.3% respectively.

CGS-CIMB maintained "add" on Magnum but reduced its target price to RM1.70 following the earnings cuts.

Meanwhile, Hong Leong Investment Bank (HLIB) Research said the impact to Sports Toto will be minimal given the limtied number of outlets in the state.

It added that Sports Toto's luxury car dealership in the UK could cushion the impact as it continues to grow, after having contributed to 32.1% of the group earnings before interest and tax in FY22.

HLIB reiterated its "buy" recommendation on Sports Toto with an unchanged target price of RM2.27 after maintaining its forecasts.

On the risk that the Perlis government could also follow suit with banning NFO operations, the research firm added that the impact from such a development would also be minimal.

Sports Toto has only four outlets in Perlis, or 0.59% out of a total 680 outlets, and none in Kelantan and Terengganu.

Following the closure of its Kedah outlets, HLIB said Sports Toto could reallocate the 20 outlets to other states as it still holds the gaming licences awarded by the Ministry of Finance.

However, it added there is a possibility the 20 gaming licences could be revoked.