KUALA LUMPUR (June 21): RHB Investment Bank has maintained its “neutral” rating on the gaming sector and said 1Q2024 sector results beat expectations on higher-than-expected sales amid strong seasonality.
In a sector update on Friday, the investment bank said despite a lack of catalysts and the sector’s generally unexciting outlook, it believes number forecast operators (NFOs) offer defensive qualities due to the inelastic demand from punters and their attractive yield profile.
“We prefer Sports Toto Bhd (KL: SPTOTO) on valuation grounds and superior yield.
“Sports Toto’s earnings and dividend exceeded expectations, primarily due to higher-than-expected sales in the gaming and motor segments, driven by stronger seasonality,” it said.
RHB IB said gaming ticket sales rose due to the Lunar New Year festive season, while motor revenue was boosted by the release of new vehicle registration plates in the UK.
“On the other hand, Magnum Bhd's (KL:MAGNUM, TP:RM1.08) results disappointed, due to an unfavourable luck factor (prize payout: 1Q24: 67.6% vs 1Q23: 64.6%),” it said.
RHB IB said lottery ticket sales for the following quarter are expected to decline after the recent strong sales driven by the Lunar New Year period.
It said beyond the immediate term, NFOs recognise the ongoing threat posed by illegal NFOs and believe they have gained market share, especially in the two northern states where the state governments do not allow NFO outlets to operate.
“This not only hampers sales recovery but also results in significant tax revenue losses for the federal government.
“In response to the ban on outlets, we understand that the NFO players are still in talks with the federal and state governments in search of remedies (eg relocation) to the current situation,” it said.
Post-results, RHB IB lifted Sports Toto’s FY2024F-2026F earnings by 14-9% after incorporating a stronger sales assumption.
“On the other hand, we cut Magnum’s FY24F earnings by 5.4% to account for the high 1Q prize payout, but maintained FY25F-26F earnings, as the luck factor/prize payout ratio typically reverts to the mean over time,” it said.