Sports Toto’s showing set for recovery in coming quarters

PETALING JAYA: Analysts are lowering their forecasts for Sports Toto Bhd’s earnings for this year due to lower revenue and higher cost projections.

At the same time, they agree that the company’s British auto retailing business H.R. Owen is anticipated to further weigh down its earnings.

Hong Leong Investment Bank Research (HLIB Research) said although Sports Toto’s management had indicated positive sales momentum for draws during the Chinese New Year, surpassing pre-Covid-19 pandemic levels in terms of sales per draw, it is less optimistic over H.R. Owen’s prospects.

The research house said this is due to H.R. Owen’s car sales which it thinks would continue to be affected by high financing costs in Britain, while at the same time juggling higher depreciation and operating costs.

“Separately, management plans to initiate discussions with the Finance Ministry to arrive at a more agreeable resolution regarding the sales and service tax (SST) hike, aiming to mitigate its impact.

“However, until a resolution is achieved, we understand that Sports Toto intends to temporarily absorb the additional tax burden and this is expected to exert pressure on margins in the interim.

“We cut our financial year 2024 (FY24) to FY26 forecasts by 13%-20%, mainly as we impute lower revenue assumptions, while at the same time raising our cost projections,” it noted.

The company’s net profit was down by 62.7% to RM24.22mil in its second quarter ended Dec 31, 2023 (2Q24), from RM64.86mil a year ago, mainly due to lower sales, higher prize payouts, and higher operating expenses. Revenue fell to RM1.37bil in 2Q24 from RM1.41bil in the similar period last year

Meanwhile, UOB Kay Hian (UOBKH) Research said it is cutting the company’s 2024-2025 net profit forecasts by 6% and 2%, respectively, as it factored in higher prize payouts for its subsidiary Sports Toto Malaysia (STM) and lower H.R. Owen earnings margin.

“We expect better clarity for the company as the political landscape stabilises and investors can now focus on the companies’ fundamental qualities.

“The company should gain more attention as the group delivers a lush prospective forecast yield of 7% for 2024. In our opinion, current valuations have more than priced in existing downsides, especially when earnings are on course for sequential recovery in upcoming quarters.

“Such valuations are particularly appealing for Sports Toto given its asset-light business model and it doles out most of the domestic cash flows as dividends.”

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