SPORTS TOTO MALAYSIA SDN BHD - 2016

MARC has affirmed its rating of AA- on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) RM800.0 million Medium-Term Notes Programme (MTN) with a stable outlook. The rating is primarily driven by Sports Toto’s strong and steady cash flow generation and its entrenched market position in the oligopolistic domestic gaming industry. Constraining rating factors are regulatory risk due to a periodic gaming licensing requirement and sizeable intercompany loans to its holding company, Berjaya Sports Toto Berhad (BToto), which reduces cash retention at the subsidiary.

Sports Toto remains a major player in the domestic Numbers Forecasting Operations (NFO) gaming sector; it has 676 outlets nationwide and offers seven game variations as at end-April 2016 (FY2016). However, Sports Toto’s ability to grow its gaming operation remains constrained by stringent government regulations on outlet expansion and prize payout policies. It is also subject to a periodic licensing requirement from the government. MARC regards Sports Toto’s licensing risk as partly mitigated by its extensive operating track record. While the domestic gaming industry is dominated by a few players, the industry has continued to face stiff competition from alternative and illegal gaming options which have weighed on revenue growth.

For FY2016, Sports Toto’s revenue was flat at RM3.2 billion while pre-tax profit declined 13.0% y-o-y to RM415.1 million. The decline is attributed partly to the costs arising from the implementation of the Goods and Services Tax (GST) since April 1, 2015, and partly due to higher prize payout. Cash flow from operations (CFO) remained steady at RM313.6 million; CFO interest coverage remained strong at 8.7 times, although this metric has been on a declining trend over the past five years in line with an overall increase in finance costs.

MARC observes that the amount due from the holding company BToto has remained significant, indicating the holding company’s continued reliance on its key subsidiary for funding support. The intercompany loans accounted for 61.0% of Sports Toto’s total assets of RM1.38 billion in FY2016 (FY2015: 65.1%; RM1.23 billion). During the financial year, dividend payout declined to RM274.0 million (FY2015: RM382.6 million) and as a result, free cash flow turned positive, standing at RM29.8 million as at end-FY2016 (end-FY2015: negative RM56.0 million).

As at end-October 2016, total borrowings comprise entirely of the outstanding RM745.0 million notes issued under the MTN programme, of which RM255.0 million will mature in June 2017. Sports Toto will have to repay at least RM45.0 million of its maturing notes with an option to renew the balance, given that the programme limit will be reduced to RM700.0 million on that date in line with the reduction schedule. MARC opines that Sports Toto has strong liquidity to meet this obligation based on its cash balance of RM380.0 million as at end-April 2016.

The stable rating outlook is premised on MARC’s expectations that the company’s credit profile will remain in line with the current rating band. However, downward rating pressure could develop should regulatory changes in the gaming industry affect the company’s business prospects and/or if there is a material weakening in the company’s liquidity position.

Major Rating Factors

Strengths

• Entrenched market position in the domestic gaming market; and
• Strong cash flow generation.

Challenges/Risks

• Licensing risks;
• Increased competition from alternative and illegal gaming options;
• Managing increased costs due to imposition of GST; and
• Low earnings retention.