KUALA LUMPUR: Sports Toto Bhd
's dividend payout is likely to revert to a historical level of more than 75% as the political headwinds in the country dissipate by FY24, said Hong Leong Investment Bank (HLIB) Research.
Following a meeting with Sports Toto's management, HLIB said the company is taking a conservative stance on conserving liquidity owing to the impending state elections and global economic uncertainties.
Sports Toto has year-to-date (9MFY23) declared a dividend per share of 6.5 sen.
HLIB projects Sports Toto's total dividend in FY23 to be nine sen per share, implying a payout ratio of about 60% and 6.5% yield.
However, HLIB said the payout would likely ramp up to more than 75% as the headwinds clear up in FY24.
In addition, HLIB said Sports Toto is expected to benefit from a potential initiative by the government to reduce tax revenue leakage by cracking down on illegal numbers forecast operators (NFO).
HLIB cited news reports that the Ministry of Finance was eyeing amendments to gaming legislations that were formed in the 1950s to ensure a more comprehensive enforcement of the industry.
"Should it come to fruition, it would be a win-win situation for the government and NFOs with increased tax revenue through diversion of illegal ticket sales to legitimate NFOs.
"Also, we understand illegal operators offer advances to punters, which might contribute to social ill as punters get trapped in a debt spiral, as opposed to legal NFOs that adhere to legal guidelines and promote responsible gaming to ensure the sustainability of the industry," said the research firm in a note.
HLIB noted that the changes to the gaming legislation would be more likely in the event there is no change of governance following the upcoming state elections.
Meanwhile, Sports Toto's luxury vehicle distribution business could face narrower operating margins due to increased expensesn from UK inflationary pressure and the commencement of the new Hatfield facility.
"Note that earnings bfore interest and tax (Ebit) margin in 9MFY23 declined to 1.4% from 3.8% in the same period last year partly due to this reason in addition to a higher base in previous year from the increased demand for used car segment," it said.
HLIB maintained its "buy" call on Sports Toto with a target price of RM1.83.
"We are wary of the impending six state polls which pose policy/regulatory uncertainty risk to the group.
"Nonetheless, should the group’s operation remain status quo post state election, stock price should recover as regulatory risks dissipate," it added.
