Gov’t bigger loser with less special draw; only minor impact on Sports Toto

NUMBER forecast operator (NFO) Sports Toto Bhd will not be unduly impacted by the decision of Prime Minister Datuk Seri Anwar Ibrahim’s unity government to shave more than half the number of special draws in 2023.

On the contrary, less special draw days only means a smaller government revenue source, according to RHB Research.

“Special draws tend to fetch lower margins vs normal draws as NFOs have to pay an additional 10% as a special contribution to the Government on all special draw gross ticket sales (after deducting the 8% gaming tax),” justified analysts Jim Lim Khai Xhiang and Lee Meng Horng in a company update.

“Historically, previous administrations have turned to special draws to shore up their coffers.”

Yesterday (Dec 5), Prime Minister Datuk Seri Anwar Ibrahim announced that the number of special draw days allowed for 2023 has been decreased to eight, from 22.

This is in stark contrast to the previous government which had in end-May this year increased the number of special draw days to 22 days from 11 days.

Foreseeing “minor impact” on earnings, RHB Research trimmed Sports Toto’s discounted cash flow (DCF) target price slightly to RM2.07 from RM2.10.

“We think the expectation of lower earnings is already in the price. Despite the increase in the number of special draw days in end-May, there was no significant improvement in Sports Toto’s 1Q FY6/2023 earnings,” observed the research house.

“We make no change to our “buy” rating, premised on its handsome 7% dividend yield. While we recognise that regulatory uncertainty and risks remain, we do not rule out the possibility of favourable policies in the future, ie the potential ramp-up in enforcement efforts against illegal NFOs.”

Hong Leong Investment Bank (HLIB) Research concurred with RHB Research that special draws have minimal impact to NFO’s earnings.

“Firstly, special draws typically have lower sales compared to normal draws because of the former’s non-routine nature,” justified analyst Tan Kai Shuen.

“Punters typically prefer to play on routine normal draws which are held on Wednesdays, Saturdays and Sundays while special draws are held on selected Tuesdays as prescribed by MOF (Finance Ministry.”

He added: “Secondly, a portion of special draw sales cannibalises the sales from normal draws. Recall that special draws have higher tax than normal draws, thus, this results in a net negative impact to earnings for this portion of sales that is cannibalized.”

All-in-all, HLIB Research also reiterated its “buy” rating on Sports Toto with an unchanged target price of RM2.27.

At 9.42am, Sports Toto was up 4 sen or 2.5% to RM1.64 with 318,000 shares traded, thus valuing the company at RM2.21 bil. – Dec 6, 2022

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