MAYBANK IB Research has reiterated its negative outlook on the number forecast operator (NFO) segment of the gaming sector with “sell” calls on both Sports Toto Bhd and Magnum Bhd amid the decision by Perlis whether to shutter NFO outlets in the Perikatan Nasional (PN)-rule state next week.
While the potential impact to both listed NFOs is negligible, it is a sobering reminder that NFO outlets in Selangor, Penang and Negri Sembilan may face the same fate as those in Kedah should the PAS and Bersatu-backed PN coalition form the next state government(s) at the upcoming state polls
“To be sure, the NFO outlets in Perlis account for <1% of total NFO outlets operated by Sports Toto and Magnum. Their closure will not have a material impact on earnings,” justified Maybank IB Research analyst Yin Shao Yang in a gaming sector update.
“(However), circa 50% of Sports Toto and Magnum earnings could be at risk if all the aforementioned state governments (Selangor, Penang and Negri Sembilan) change.”
Barely six months after Kedah shuttered all NFO outlets on Jan 1, Perlis is likely to follow the footstep of the former to ban gambling activities in the state after three NFO outlets in Kangar have already received notices that their business premise licenses will not be renewed when they expire.
Apart from the three outlets, Perlis has another three outlets in Padang Besar (two) and Kuala Perlis (one). Of the 3 NFO outlets in Kangar, two are operated by agents of Sports Toto with the other outlet operated by an agent of Magnum.
While Maybank IB Research has left its discounted cash flow-based target price of RM1.04 and 91 sen for Sports Toto and Magnum respectively unchanged, it foresees a huge risk of NFO outlets in Selangor, Penang and Negri Sembilan being shuttered should PN come into power in those states in 3Q 2023.
According to the research house, Sports Toto’s NFO outlets in Selangor, Penang and Negri Sembilan account for 22%/8%/5% of its total NFO outlets while for Magnum, its NFO outlets in Selangor, Penang and Negri Sembilan account for 18%/9%/6% of its total NFO outlets nationwide.
“Assuming average NFO sales/draw/outlet are uniform and NFO outlets are shut on Jan 1, 2024 should state government(s) change in Selangor, Penang and Negri Sembilan, our long-term earnings estimates for Sports Toto could be slashed by 52% and for that of Magnum by 48%,” projected Maybank IB Research.
At 10am, Sports Toto was traded down 1 sen or 0.71% to RM1.39 with 268,300 shares traded (market cap: RM1.88 bil) while Magnum was up 1 sen or 0.99% to RM1.02 with 190,900 shares traded (market cap; RM1.47 bil). – June 12, 2023
Main pic credit: The Star