Sports Toto Malaysia Sdn Bhd - 2013

MARC has affirmed its AA- rating on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) up to RM800.0 million Medium Term Note Programme (MTN) with a stable outlook. The rating action affects the outstanding RM580.0 million under the MTN programme. The affirmed rating reflects Sports Toto’s strong cash flow generation from its longstanding involvement in the Numbers Forecasting Operations (NFO) gaming segment and its fairly entrenched market position in Malaysia’s gaming sector. Constraining the rating is the significant regulatory risk that domestic gaming companies are exposed to and the historically low earnings retention at the company level.

Sports Toto is a leading player in the domestic NFO gaming segment, an oligopoly in which the number and types of NFO game offerings and the size of outlet network are key determinant factors for market strength and gaming revenue. In this regard, MARC notes that Sports Toto currently has the highest number of game variations and the largest network of outlets nationwide as compared to its peers. MARC notes that the NFO gaming segment continues to be highly regulated; any changes in the gaming tax regime can potentially impact the company’s financial performance. Nonetheless, the rating agency views that the sizeable tax revenue generated by the NFO gaming segment reduces the risk of significant policy changes. Sports Toto’s exposure to regulatory risk is also mitigated by its long operational track record since 1969.
 
MARC notes that Sports Toto’s holding company, Berjaya Sports Toto Berhad (BToto), is in the final stages of divesting its entire 100%-interest in the gaming company to Sports Toto Malaysia Trust (STM-Trust), a business trust incorporated in Singapore that is expected to be listed on the Singapore Exchange (SGX) by 4Q2013. In order to facilitate the listing, the existing security features consisting of Sports Toto’s share pledge and corporate guarantee from BToto for the MTN programme will be replaced with cash of up to RM571.3 million from part proceeds from the listing exercise with the balance to be backed by additional cash and/or bank guarantee facility from a AAA-rated financial institution that would fully cover the principal repayment of the outstanding RM580.0 million MTNs. The coupon payments will be serviced from Sports Toto’s operating cash flows. MARC considers the security replacement which would fully collateralise the outstanding principal to enhance the protection afforded to MTN noteholders.

For financial year ended April 30, 2013 (FY2013), Sports Toto’s revenue registered a marginal increase of 0.3% to RM3,441.8 million (FY2012: RM3,432.3 million) while operating profit grew 7.5% to RM592.9 million in FY2013 (FY2012: RM551.8 million) due mainly to a RM26.8 million gain on disposal of its subsidiaries during the year. Excluding the one-off gain on disposals, operating profit would increase marginally by 2.6% to RM566.1 million, translating to an operating profit margin of 16.5% in FY2013 (FY2012: 16.1%) .

Sports Toto’s cash flow from operations (CFO) has remained strong at RM379.9 million in spite of a 5.7% year-on-year decline (FY2012: RM402.9 million). Aside from the outstanding notes of RM580.0 million under the rated programme, Sports Toto has no other borrowings as of end-July 2013 (1QFY2014). MARC observes that the amount due from the holding company which has been a recurrent feature of its balance sheet, accounts for about 73.6% or RM933.6 million of its total current assets (RM1,268.8 million). This is expected to be addressed through the impending listing exercise. Dividends upstreamed to the holding company declined by 59.2% to RM188.5 million during the year (FY2012: RM462.2 million) while Sports Toto’s debt service cover ratio (DSCR) of 20.5 times as at FY2013 (FY2014: 24.9 times) provides comfortable covenant compliance headroom vis-à-vis the minimum covenanted level of 1.50 times. MARC notes the next debt repayment of RM180.0 million under the MTN programme is due in mid-2014. While the current outstanding notes have a maturity profile of up to 2017, the company can roll over the notes under the rated MTN programme which ends in June 2020.

The stable rating incorporates MARC’s expectations that the company’s business and credit profile will remain commensurate with the current rating band. However, if the outstanding principal under the MTN programme becomes fully collateralised as planned, the rating agency will reassess the rating for a potential upgrade.   

Strengths

Challenges/Risks

• Historically low earnings retention; and
• Regulatory risk.