CREDIT ANALYSIS REPORT

SPORTS TOTO MALAYSIA SDN BHD - 2019

Report ID 6047 Popularity 1541 views 64 downloads 
Report Date Dec 2019 Product  
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Rationale

MARC has affirmed its rating of AA- on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) RM800.0 million 15-year Medium-Term Notes (MTN) Programme. The rating carries a stable outlook. The affirmed rating is primarily driven by Sports Toto’s strong and steady cash flow generation and its entrenched market position in the domestic number forecast operator (NFO) gaming sector. The key moderating factor is licensing risk, given that licences to operate NFO games are subject to annual renewal by the government.

Sports Toto remains a major player in the oligopolistic domestic gaming sector in which players are subject to stringent government regulations on outlet expansion, draw dates and prizes. This has been reflected in the government’s decision to reduce the number of special draws from 22 in 2018 to 11 in 2019 and recently to eight under Budget 2020, a move that will further crimp revenue growth of NFO players going forward. In respect of licensing risk, Sports Toto’s established position with 676 outlets nationwide and a long operating track record since 1969 partly mitigates this risk. The gaming sector has also faced stiff competition from illegal and internet gaming that have continued to weigh on revenue growth. However, the government’s initiative under Budget 2020 to impose higher penalties on illegal gambling activities could provide some boost to Sports Toto’s games.

Sports Toto’s profitability was largely in line with its historical performance, with revenue of RM3.6 billion for the 14-month period ending June 2019. Cash flow from operations, however, was strong at RM372.2 million, driven by lower operating costs and a goods and services tax (GST) holiday between June and September 2018. In the previous period, Sports Toto had absorbed about RM63 million in GST.

Apart from the RM800.0 million notes currently outstanding under the rated programme, Sports Toto has no other borrowings. Its liquidity position remains sound, supported by ample cash reserves of RM295.5 million. However, its sizeable dividend payment, which historically has stood high at an above 90% payout, could dent the cash reserves. MARC notes another recurrent feature of Sports Toto’s balance sheet is the large amount due from holding company Berjaya Sports Toto Berhad, indicating the holding company’s reliance on the subsidiary for funding support. The amount due from the holding company accounted for 67.0% of Sports Toto’s total assets of RM1.4 billion as at end-June 2019.

The stable rating outlook is premised on MARC’s expectation that Sports Toto’s credit profile would remain in line with the current rating band. Changes in domestic gaming regulations and/or licensing requirements 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; and
  • Healthy cash flow generation relative to debt service requirements.

Challenges/Risks

  • Licensing risk;
  • Competition from alternative and illegal gaming; and
  • Low cash retention.
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