SPORTS TOTO MALAYSIA SDN BHD - 2018

MARC has affirmed its rating of AA- on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) RM800.0 million 10-year Medium-Term Notes Programme (MTN-1) and RM800.0 million 15-year Medium-Term Notes Programme (MTN-2). The rating carries a stable outlook. The combined outstanding amount under the programmes, which cannot exceed RM800 million at any time, stood at RM745.0 million as at end-August 2018.

Sports Toto remains a major player in the domestic number forecast operator (NFO) market which is governed by stringent regulations and periodic licensing requirement that continue to pose licence renewal risk. This risk is partly mitigated by the company’s established position with 676 outlets nationwide and a long operating track record since 1969. While the domestic NFO gaming sector is oligopolistic which enables the key players to have a sizeable market share each, the sector faces stiff competition from illegal and internet gaming, crimping revenue growth.

For financial year ended April 30, 2018 (FY2018), Sports Toto recorded flat growth with revenue of RM3.12 billion but a 9.2% y-o-y increase in pre-tax profit to RM363.0 million largely due to lower prize payouts. Accordingly, cash flow from operations was higher at RM237.0 million (FY2017:RM197.5 million), providing a healthy CFO debt coverage of 0.3 times. The reintroduction of the Sales and Service Tax (SST) effective September 1, 2018, is expected to have no impact on Sports Toto’s financials as the tax rate applied is similar to the Goods and Services Tax (GST).

Apart from the present outstanding under the rated programmes, Sports Toto has no other borrowings; liquidity position is moderate as reflected by a cash balance of RM222.8 million as at April 30, 2018. MARC notes a recurrent feature of Sports Toto’s balance sheet is the large amount due from the holding company, Berjaya Sports Toto Berhad (BToto), accounting for 70.2% of its total assets of RM1.27 billion in FY2018. Dividend payout remains high at more than 100.0% of its profit after tax for FY2018.

The stable rating outlook is premised on MARC’s expectations that the company’s credit profile would remain in line with the current rating band. Changes in domestic gaming regulations and/or licensing requirement would prompt a rating reassessment that could negatively impact the rating.

Major Rating Factors

Strengths

• Entrenched market position in the domestic gaming market;
• 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
• Low cash retention.