SPORTS TOTO MALAYSIA SDN BHD - 2017

MARC has assigned a rating of AA- to Sports Toto Malaysia Sdn Bhd’s (Sports Toto) proposed RM800.0 million 15-year Medium-Term Notes Programme (MTN-2). Concurrently, the rating agency has affirmed its AA- rating on Sports Toto’s existing RM800.0 million 10-year Medium-Term Notes Programme (MTN-1) which will expire in June 2020. The outlook on the ratings is stable.

The drawdowns under MTN-2 are expected to be staggered to meet payments of notes that come due under MTN-1, of which the current outstanding stands at RM775 million. Given that the aggregate outstanding under MTN-1 and MTN-2 will not exceed RM800 million under the principal terms of the proposed MTN-2 programme, any risk of a substantial increase in Sports Toto’s leverage position post-MTN-2 issuance is mitigated.

Sports Toto, which is wholly-owned by Berjaya Sports Toto Bhd (BToto), remains a major player in the oligopolistic number forecasting operations (NFO) domestic gaming industry with the largest number of outlets among the NFO players. The company operates in a highly regulated gaming industry with a stringent periodic licensing requirement. As such, Sports Toto remains exposed to licence renewal risk which is partly mitigated by the company’s long operating track record. Sports Toto continues to face stiff competitive pressure within the domestic NFO industry and from illegal gambling operations that have weighed on its financial performance. Over the last four years, the operating profit margin has fallen to 14.2% in financial year ended April 30, 2016 (FY2016) from 17.2% in FY2013.

For FY2016, Sports Toto’s revenue was flat at RM3.2 billion while pre-tax profit has declined by 13% y-o-y to RM415.1 million. Correspondingly, cash flow from operations (CFO) declined by 4.0% y-o-y to RM313.6 million during the period. Notwithstanding the decline, CFO interest and debt coverage ratios remained steady at 8.7 times and 0.35 times (FY2015: 9.8 times; 0.42 times). MARC views the ongoing challenges in the gaming sector would impact Sports Toto’s financial performance over the intermediate term. For 9MFY2017, revenue was flat at RM2.3 billion y-o-y while pre-tax profit decreased by 8.5% y-o-y to RM254.1 million. Sports Toto’s liquidity position, however, is healthy with a cash balance of RM239.6 million as at end-January 2017. MARC also notes that significant loans to its parent BToto remain a feature of Sports Toto’s balance sheet, indicating the holding company’s continued reliance on Sports Toto for funding support. The intercompany loans accounted for 69.2% of Sports Toto’s total assets of RM1.28 billion as at end-9MFY2017 (FY2016: 61.0%). In addition to intercompany advances, Sports Toto declares sizeable cash dividends annually; during 9MFY2017, it distributed dividends of RM185.7 million (9MFY2016: RM128.8 million), accounting for more than 100% of its profit after tax for the period. The high dividend payout has hampered any improvement in earnings retention.

The stable rating outlook is premised on MARC’s expectations that Sports Toto will continue to generate strong cash flow such that its debt coverage remains commensurate with the current rating band. MARC expects its CFO debt coverage to remain above 0.3 times. Any sharp decline in CFO and/or change in the regulations on the gaming industry would result in downward rating pressure and may necessitate a rating reassessment.

Major Rating Factors

Strengths

• Entrenched market position in the domestic gaming market with the largest domestic network of outlets;
• Good operating track record underpinned by market knowledge and operations expertise; and
• Healthy cash flow generation relative to debt service requirements.

Challenges/Risks

• Licensing risks;
• Competition from alternative and illegal gaming options; and
• High annual dividend payout to holding company restricts earnings retention.