SPTOTO: Quarterly Profit Declines Amidst Higher Payouts, Outlook Remains Cautious

A prominent investment bank reported a significant 46.5% year-on-year decline in net profit for the first quarter of fiscal year 2026, reaching RM22.1 million. The results fell considerably short of both the bank’s own and consensus full-year estimates, primarily due to higher-than-expected prize payouts. Despite the notable profit contraction, revenue for the period saw a modest increase of 3.7% year-on-year.

Performance Review

For 1QFY26, total revenue rose to RM1,496.6 million, an increase of 3.7% compared to the previous year. This growth was predominantly fueled by the lottery division, which posted a 5.4% revenue increase driven by higher average sales per draw, following an uptick in accumulated jackpot prizes. The motor dealership segment also contributed positively, recording a 1.9% revenue growth on the back of higher sales volume in the new car sector.

The sharp decline in net profit, however, was largely attributable to a 20.8% drop in the lottery division’s pretax profit, a direct consequence of elevated prize payouts. Concurrently, the motor dealership business registered a pretax loss of RM9.4 million during the quarter, further impacted by higher operating costs exacerbated by inflationary pressures in the UK.

Future Outlook and Rating

The investment bank has revised its earnings forecasts for FY26-28F downwards by an average of 8%, factoring in expectations of reduced profit margins due to anticipated higher cost structures. While the bank acknowledges the inherent stability of the company’s domestic market-centric business, it maintains a cautious stance regarding potential governance and transparency concerns.

These concerns stem particularly from a recent acquisition of property assets from a related party, which the bank deems to be at an expensive valuation. Specifically, the RM24.9 million cash consideration for three commercial units from its sister company, priced at RM15,211 per square foot, has raised eyebrows. Despite the company possessing substantial cash reserves exceeding RM600 million, the bank finds the justification for investing in these income-generating assets and their potential for future capital appreciation unconvincing.

The company declared a first interim dividend of 2.0 sen per share, maintaining the previous year’s payout. Given these factors, the investment bank has maintained its “Neutral” rating for the stock, with a revised target price reduced from RM1.48 to RM1.43.