SPTOTO: Investment Bank Upgrades Rating, Raises Target Price Amidst Dividend Surprise

Financial performance for the interim half-year 2026 (IHFY26) saw core profit align with internal expectations, though it fell below broader consensus estimates. Despite this, an investment bank has upgraded its rating for the company from “Hold” to “Buy” and increased its target price, citing a revised dividend assumption. The period also saw the declaration of a second interim dividend.

Performance Review

The company reported a core profit of RM63.9 million for IHFY26, meeting the investment bank’s internal projections, which represented 46% of its full-year forecast. However, this figure did not reach consensus expectations. Shareholders received a second interim dividend of 3 sen per share, bringing the year-to-date total dividend to 5 sen per share.

The Number Forecast Operators (NFO) segment demonstrated a 4.3% year-on-year increase in revenue, reaching RM1.5 billion, primarily bolstered by an additional draw and improved sales per draw. Conversely, the NFO segment’s Earnings Before Interest and Tax (EBIT) declined by 10% year-on-year to RM178.2 million, largely attributable to a higher prize payout experienced in the first quarter of FY26. Notably, the second quarter of FY26 saw a significant rebound, with EBIT surging 52.3% quarter-on-quarter as the prize payout structure normalized.

In the car franchise division, H.R. Owen, revenue remained largely stable at RM1.4 billion. However, the Loss Before Interest and Tax (LBIT) expanded by 72.9% to RM14.3 million, primarily due to rising staff costs.

Future Outlook and Challenges

Looking ahead to the third quarter of FY26, NFO revenue is anticipated to improve sequentially, projected at RM19-20 million per draw, driven by seasonal factors. Despite this short-term improvement, year-on-year earnings are likely to be lower due to the absence of a Jackpot bonanza, which had significantly boosted 3QFY25 revenue.

The global economic landscape presents challenges, with ongoing trade uncertainty, tariffs, and import restrictions expected to dampen consumer confidence in the UK. This could particularly impact spending on luxury goods, affecting the car franchise segment.

Domestically, the company, along with other NFOs, continues to challenge the Kedah and Perlis state governments’ refusal to renew their operating licences. A hearing is scheduled at the Federal Court in May 2026, and there is a possibility that NFOs may seek damages from federal or state governments should the ruling favour them.

Investment Recommendation

Based on a revised dividend discount model (DDM) valuation, which incorporates an increased FY26-27 Dividend Per Share (DPS) assumption of 10 sen (up from 8 sen previously) due to minimal projected capital expenditure, the investment bank has raised its target price to RM1.59 per share (from RM1.55). This represents an upside of 15.2% from the last traded price of RM1.38. Consequently, the investment bank has upgraded its recommendation on the company from “Hold” to “Buy”.