KUALA LUMPUR: Number forecast operators (NFOs) beat results expectations in the first quarter of 2024 on higher-than-expected sales but it is not likely to continue.
The higher sales in the quarter is attributed to the Lunar new Year period .
RHB Investment Bank Bhd (RHB Research) believes that NFOs offer defensive qualities due to inelastic demand from punters and their attractive yield profile.
This is despite the lack of catalysts and the gaming sector's generally unexciting outlook, the firm said in a note today. Nevertheless, RHB Research said lottery ticket sales for the following quarter are expected to decline after the recent strong sales driven by the Lunar New Year period.
"Beyond the immediate term, NFOs recognise the ongoing threat posed by illegal NFOs and believe the latter has gained market share, especially in the two northern states where the state governments do not allow NFO outlets to operate," it said.
"This not only hampers sales recovery but also results in significant tax revenue losses for the Federal Government. "In response to the ban on outlets, we understand that the NFO players are still in talks with the federal and state governments in search of remedies, such as relocation, to address the current situation," it noted.
As such, RHB Research said key catalysts for the gaming sector re-rating include the enactment of stricter legislation against illegal NFOs and the legalisation of online gaming.
However, it believes that favourable policies for NFOs are currently not prioritised by the federal government.
RHB Research has also maintained a "Neutral" stance on the overall gaming sector, stating a preference for Sports Toto Bhd due to its attractive valuation and superior yield.
The firm added that Sports Toto's earnings and dividend exceeded expectations, primarily due to higher-than-expected sales in the gaming and motor segments, driven by stronger seasonality. While, gaming ticket sales rose due to the Lunar New Year festive season, while motor revenue was boosted by the release of new vehicle registration plates in the UK.
However, it pointed out that Magnum Bhd's results were disappointing due to an unfavourable luck factor.
Additionally, RHB Research also said Sports Toto's UK auto retailing business HR Owen sales are also expected to decline after a seasonally strong 3Q24 (June).
"We believe it will continue to face challenges from high inflation and interest rates in the UK. With higher depreciation and interest expenses from its newly launched Hatfield showroom, we believe HR Owen's margin will remain under pressure. That said, we highlight that Sports Toto dividends are mainly from its lottery business. Hence, the challenges at HR Owen should not hamper Sports Toto's dividend payouts," it added.
RHB Research has lifted Sports Toto's financial year 2024-2026 (FY24-26) forecast earnings by 14 per cent to nine per cent after incorporating a stronger sales assumption.
On the other hand, the firm has trimmed Magnum's FY24 forecast earnings by 5.4 per cent to account for the high 1Q prize payout, but maintained FY25-26 forecast earnings.
This was based on the expectation that the luck factor or prize payout ratio typically reverts to the mean over time.