SPTOTO: Investment Bank Upgrades Rating to Buy Following Strong Earnings and Attractive Yield

A recent investment bank report has upgraded the rating of a prominent gaming company to BUY from Neutral, citing an improved risk-reward profile following recent share price weakness. The unchanged target price of MYR1.60 (as per the underlying report) implies a 14% upside and an attractive 8% FY27F yield, making it a defensive play with appealing dividend prospects.

Performance Review

The company’s core net profit for FY25 reached MYR237 million, marking a 7.5% year-on-year increase. This performance aligned with expectations, meeting 99% of the investment bank’s full-year forecast and 96.2% of consensus estimates. The strong earnings growth was primarily propelled by a 13.1% year-on-year increase in gaming pre-tax profit (PBT), attributed to a lower prize payout ratio of 58.8%, down from 60% in FY24. However, this positive momentum was partially counteracted by a 25.2% year-on-year decline in PBT contributions from its UK subsidiary, HR Owen, due to elevated operating expenses associated with brand positioning initiatives. The company also declared a fourth interim dividend per share of 2 sen, bringing the year-to-date total to 8 sen, consistent with expectations.

Future Outlook

Looking ahead, the investment bank anticipates an improvement in gaming sales in the coming quarter, driven by the MYR78 million accumulated Supreme Toto 6/58 pool. HR Owen is also expected to see a modest uplift in sales following the September car plate campaign in the UK. Despite these positive indicators, distributorship margins are projected to remain under pressure, primarily due to persistently high operating costs and depreciation stemming from recent land acquisitions in the UK. These acquisitions, funded via internal resources, are strategically aimed at reducing lease payments over time, providing long-term cost efficiencies.

Investment Rationale and Risks

The investment bank maintains its earnings forecasts and its discounted cash flow (DCF)-derived target price of MYR1.60. The upgrade to BUY is fundamentally driven by the recent softening of the share price, which has enhanced the stock’s risk-reward ratio. Trading at approximately 8 times price-to-earnings (P/E), about one standard deviation below its five-year mean, the stock offers a defensive profile with limited downside, underpinned by resilient cash flow generation and a sustainable dividend yield. The improved sales outlook, combined with the stock’s defensive earnings nature and attractive yield, suggests a potential re-rating towards its historical average.

Key downside risks include an unfavourable luck factor, adverse government policies, and softer-than-expected ticket sales.