CGS-CIMB Research said the recent development in Kedah comes as a negative surprise, as NFO outlets in Kedah remained operational even after November 2021, up until the expiry of their permits at end-2022.
KUALA LUMPUR: The Kedah number forecast operators’ (NFOs) outlet closures will further dampen the already weak investor sentiment on such stocks, at least in the near term.
This is due to concerns over more severe crackdowns on the sector (outlet closures, restrictions on gaming activities and fewer special draws), according to gaming sector analysts.
CGS-CIMB Research said the recent development in Kedah comes as a negative surprise, as NFO outlets in Kedah remained operational even after November 2021, up until the expiry of their permits at end-2022.
The research unit has cut its estimates of Sports Toto Bhd
’s core earnings per share (EPS) for the financial years ending June 30 in 2023, 2024 and 2025 (FY23 to FY25) by 2.1%, 4.7% and 4.7%, respectively.
Aside from Kedah, Kelantan and Terengganu (no NFO outlets operate in the latter two states), Perlis makes up only 0.6% of Sports Toto’s total outlets.
However, the research house noted that due to NFO sales recovery and normalisation of the effective tax rate (post-prosperity tax in FY22), Sports Toto’s core EPS is estimated to rise 10.4% in FY23 (compared with the previous financial year).
As for Magnum Bhd, the research unit estimated that its core EPS would expand 110% and 9%, respectively, year-on-year in FY23 and FY24 (financial years ending Dec 31).
This is thanks to the continued NFO sales recovery to 84% and 89%, respectively, of FY19 (pre-Covid-19) levels, coupled with the normalisation of prize payout ratio and effective tax rate (the latter two in FY23).
While its “add” calls are maintained, CGS-CIMB Research’s discounted cashflow (DCF)-based target prices for Sports Toto and Magnum stocks fall 5% and 6% to RM1.90 and RM1.70, respectively, following the estimated earnings cuts.
Meanwhile, Hong Leong Investment Bank (HLIB) Research said the earnings impact from Sports Toto’s outlet closures in Kedah will be moderate, as they consist of only 2.9% of the group’s total outlets (20 out of 680 outlets).
“The impact is also cushioned by its growing luxury car dealership segment in the United Kingdom, which contributed 32.1% of the group’s earnings before interest and taxes in FY22,” said HLIB Research.
The research unit also pointed out that there is the possibility of reallocation of NFO outlets to other states.
For NFOs, the business licences are issued and governed by the state. However, the gaming licences are awarded by the Finance Ministry (MoF).
“Following the closures in Kedah, MoF could either allow Sports Toto to reallocate the 20 outlets to other states while there is also a possibility that the 20 licences may be revoked,” it said.
HLIB Research pointed out that Sports Toto’s stock currently offers a generous dividend yield of 8.6%, and maintained its “buy” call with an unchanged target price of RM2.27, based on the DCF valuation.
