THE business models of number forecast operators (NFOs) have a history of being defensive and resilient during times of crisis, according to AllianceDBS Research, who points to the industry’s track record during the 1998 and 2008 crises, where listed NFOs saw insignificant impact to their gaming revenues.
“Despite continued global uncertainties, we maintain our positive stance on the NFO sector, in view of the relative defensiveness and resilience of its business model, attractive dividend yield of about 5% or more and, continued bright earnings prospects. As such, we continue to advocate investing in the NFOs as we remain positive on the sector’s fundamentals and its growth prospects,” said AllianceDBS Research analyst Cheah King Yoong.
The NFOs’ gaming revenues became the metric to gauge the defensiveness of the sector during a crisis, due to the players’ profits being highly affected by the prize payout ratio, according to Cheah.
“We wish to highlight that in 1999, the NFOs had to withstand not only the aftermath of the
Asian financial crisis, they also had to endure the 1% increase in gaming tax effective Nov 1 1998, which was then passed on to punters through adjustments in the first prize,” he noted.
Moving forward, however, the analyst believes the main catalyst will be the continued crackdown on illegal NFO activities, with the temporary closure of gaming operations due to the Movement Control Order (MCO) not altering Cheah’s positive position on Berjaya Sports Toto Bhd (BJToto) and Magnum Bhd. However, earnings estimates have been revised downwards by about 12% and 13% respectively, due to the 19 draws that will be lost due to the MCO.
“We wish to highlight that more than 85% of BJToto and Magnum’s operating expenses are variable in nature, which mainly consist of prize payout, betting duty and agency fees. This partly helps mitigate the financial impact arising from fewer draws,” said Cheah.
Government change may serve as catalyst
The recent change in government, which often spells change for the NFO players, is instead viewed as a catalyst for the sector, as the analyst opines that the authorities will be cracking down on illegal operations to increase tax revenue collection.
“Even with the recent change of government, we believe that the authorities will remain committed in curbing illegal NFO activities to increase tax revenue collection. Improved ticket
sales due to punters switching back to the legal NFOs could improve the government’s fiscal position,” said Cheah, noting that the estimated loss in tax revenue due to illegal NFOs is more than RM2 bil.
The illegal NFOs’ market size is estimated to be double that of the legalised NFOs, despite stringent enforcement since the second half of 2018. Cheah expects enforcement efforts and clampdowns to intensify towards the later half of 2020 for both sellers and punters in the illegal market, which could be yet another catalyst for the sector, since there is still plenty of room to gain from cracking down on the illegal NFOs.
However, one development that could become a major deterrent is the implementation of punitive minimum penalties for both punters and sellers as announced in Budget 2020. The higher minimum mandatory penalties proposed by the Pakatan Harapan administration will see the authorities needing to amend legislations to include them, though this has been delayed both by the change in government and the Covid-19 pandemic.
“Despite this delay, we are optimistic that the proposal will be tabled in the later part of this year. We anticipate minimal opposition for these amendments given that the main objective is to wipe out illegal NFOs to protect public interests,” said Cheah, adding that the higher penalties, if enforced effectively, could greatly discourage punters and illegal operators from participating in the illegal NFO market, thus improving the earnings prospects of the legal operators.
Buy maintained on BJToto
For the individual operators, the preferred player is BJToto with a buy call maintained, though with a lower target price of RM2.90, from a previous RM3.10.
“Our target price is higher than consensus as we have adopted a more aggressive valuation basis. We believe that the market has under-appreciated the intensified efforts by the authorities to curb illegal NFO activities and upcoming implementation of minimum penalties,” said Cheah.
The analyst also notes that BJToto’s share price performance is highly correlated to market expectations of its forward earnings before interest, taxes, depreciation and amortisation (EBITDA), which means efforts to improve the group’s earnings prospects, such as new game variants and more stringent enforcement on curbing illegal NFOs could serve as key re-rating catalysts.
According to the analyst, BJToto also currently offers an attractive sustainable yield of more than 6%, which will also support the higher target price compared to consensus.
“Potential and ongoing monetary easing moves by major global central banks and Bank Negara Malaysia (BNM) could also promote a yield-seeking investing strategy, which favours companies like BJToto,” said Cheah.
Magnum sees buy call maintained as well
A buy call is also maintained on Magnum, with a lower target price of RM3.05 from a previous RM3.20, which is again higher than consensus due to higher earnings estimates for the group’s 2020 and 2021 financial years, due to Cheah being more positive on the group’s growth prospects on the back of the ongoing efforts to curb illegal NFOs.
“On the other hand, our FY20 dividend per share is lower than consensus as we are cautious that the potential RM183 mil tax liabilities imposed by the Inland Revenue Board could restrict its ability to pay out high dividends going forward,” noted Cheah. — April 14, 2020
