KUALA LUMPUR (June 17): Number forecast operators (NFOs) have finally opened their doors after three months of temporary closure due to the movement control order (MCO).
While 2020 may be a bleak year for listed NFOs Magnum Bhd and Berjaya Sports Toto Bhd (BST), as is the case with most other businesses, analysts remain bullish on the two companies’ prospects.
AllianceDBS Research analyst Cheah King Yoong, in a note today, said growth prospects of NFOs remain bright, as they continue to benefit from the clampdown on illegal operations.
“As dominant players in the NFO sector, we are optimistic that BST and Magnum will continue to benefit from the authorities’ more stringent enforcement to curb illegal NFO activities, which will continue to drive their earnings growth,” he said, adding that both BST and Magnum offer an attractive dividend yield of more than 5% for financial year of 2021 (FY21).
Cheah maintained a “Buy” recommendation for both BST and Magnum, with unchanged target prices of RM2.95 and RM3 respectively.
Meanwhile, UOB Kay Hian expects a swift recovery for NFOs to pre-lockdown level when the draws recommence, given the inelastic consumer base. It is also anticipating a gradual recovery in share prices, taking into account the defensive business nature of NFOs.
“Investment sentiment on NFO stocks should improve in the interim period, as investor focus may switch from the unfolding of recessionary effects and rise in Covid-19 infections to fundamentally resilient businesses which can deliver recoveries faster when the MCO is lifted,” UOB Kay Hian said in a note today.
NFOs could in fact benefit from the “revenge spending” phenomenon, as the research house sees the resumption of draws to excite punters.
UOB Kay Hian said gaming stocks including Magnum and BST, are appealing as they will offer a sustainable yield of more than 6% from FY21 onwards. The research house has maintained its “Buy” call for Magnum with a higher target price of RM2.55 and “Hold” call for BST with an unchanged target price of RM2.46.
“We expect ticket sales to normalise and grow gradually when the draws recommence and operations resume from today onwards, given the inelastic consumer base,” said UOB Kay Hian.
Additionally, the 90-day lockdown resulted in 39 fewer NFO draws, which means a loss in tax revenue for the government.
Thus, UOB Kay Hian wrote that it does not rule out the possibility that the government may increase or restore special draws for NFOs to enhance federal revenue, offsetting the shortfall in ticket sales.
The research house had previously reduced its FY20 earnings forecast by cutting NFOs’ projected earnings per share (EPS) by 30% to 35%.
An analyst, speaking on condition of anonymity, said that for the long term, NFOs are still worth a bet as once things go back to pre-lockdown times, earnings would be stable. “Plus, these guys pay 75% of earnings as dividends,” the analyst said.
Dividend yield for this year, however, will be lower as one third of the earnings will be slashed due to the MCO, the analyst added.
Moreover, as NFOs tend to be considered a small ticket item, revenue does not usually drop that much in times of a recession, he said.
“Gaming stocks and aviation stocks, both alike, have an inverse correlation with the number of new Covid-19 cases,” the analyst said. In short, this means that confidence will appreciate alongside the share price, as the number of new Covid-19 cases decreases.
Shares of Magnum closed six sen or 2.61% lower at RM2.36 today, valuing the company at RM3.39 billion, while BST fell two sen or 0.88% to RM2.30, giving it a market capitalisation of RM3.11 billion.