SPTOTO: Gaming Sector Player’s Earnings Miss Expectations Amid Margin Pressure, Rating Downgraded

A prominent gaming sector player reported a first-quarter core profit for FY26 that significantly fell short of both internal and consensus estimates, primarily due to higher-than-anticipated prize payouts and widespread margin compressions. The investment bank has subsequently downgraded its recommendation for the stock.

Performance Review

For the first quarter of fiscal year 2026 (IQFY26), the company recorded a core profit of RM20.2 million, which was approximately 9% below analysts’ and consensus full-year estimates. This shortfall was largely attributed to a higher-than-expected prize payout during the period. Despite a marginal 3.7% year-on-year (YoY) revenue growth, the IQFY26 core profit experienced a significant 45.7% YoY decline, stemming from margin pressures across both its Number Forecast Operators (NFO) and car franchise divisions. A first interim dividend of 2 sen per share was proposed, consistent with IQFY25.

Operational Deep Dive

The NFO division saw its revenue climb 5.4% YoY to RM718 million, buoyed by increased accumulated jackpot amounts in Lotto games. However, this growth did not translate to profit, as NFO EBIT contracted by 22.6% due to the surge in prize payouts, which compressed the EBIT margin to 9.8% from 13.4% in IQFY25.

Concurrently, the car franchise segment, H.R. Owen, posted a modest 1.9% YoY revenue increase, primarily from higher car sales. Despite this, the segment’s loss before interest and tax (LBIT) remained largely unchanged at RM5.6 million compared to RM5.0 million in IQFY25. The overall lackluster performance in car sales was attributed to subdued consumer sentiment in the UK, exacerbated by global trade uncertainties.

Analyst Revisions and Outlook

In light of the weaker performance, analysts have revised down earnings projections for FY26 and FY27 by 9.0% to 38.9%. These adjustments factor in a higher FY26 prize payout assumption of 55%, a 1-2% increase in H.R. Owen’s operating expenses for FY26-27, and a revision of the GBP/MYR exchange rate to RM5.50 from RM5.90. The FY27 dividend forecast has also been cut to 8 sen per share from 10 sen per share.

Looking ahead to 2QFY26, NFO revenue is anticipated to decline quarter-on-quarter by RM15-17 million per draw. This expected dip is primarily due to seasonal factors and the absence of a jackpot bonanza, which typically stimulates punter excitement. Furthermore, the persistent global trade uncertainty and import restrictions are expected to continue dampening consumer confidence in the UK, potentially impacting spending on luxury goods, particularly high-value supercars.

Valuation and Recommendation

Following a review of the dividend assumptions and the revised outlook, the investment bank has adjusted its Dividend Discount Model (DDM) valuation for the stock to RM1.55 per share, down from RM1.71 previously. Consequently, the recommendation for the stock has been downgraded to Hold from Buy.