MARC Ratings has affirmed its rating of AA- on STM Lottery Sdn Bhd’s RM800.0 million 15-year Medium-Term Notes (MTN) Programme with a stable outlook. 

The rating affirmation considers STM Lottery’s entrenched domestic market presence as a number forecast operator (NFO), well-established operating track record and strong cash flow generation relative to its debt obligations. Operating in the domestic oligopolistic gaming industry, STM Lottery has the most number of outlets. The rating remains moderated by the company’s license renewal granted by the Ministry of Finance (MoF) and regulatory risk. 

For financial year ended June 30, 2023 (FY2023), STM Lottery recorded revenue of RM2.8 billion on 175 draws (FY2022: RM2.1 billion; 138 draws) as the full resumption of business operations led to a higher number of draws. Average revenue of RM16.2 million per draw remains lower than the pre-pandemic level (FY2018: RM17.6 million), affected by the prolonged pandemic-induced closures. In addition to being impacted by the business closure during the pandemic, STM Lottery and other NFOs also continued to face stiff competition from online and illegal gaming operations that were able to carry on with their operations during the pandemic period.

STM Lottery remains exposed to regulatory risk at the state and federal levels, evidenced by the closure of its outlets in Kedah (19 outlets) effective January 1, 2023, and in Perlis (4 outlets) progressively from July 17, 2023, as the respective state governments ceased the renewal of the outlets’ business licences by MoF. The recent change in the federal taxation regime — the sales and services tax increasing to 8% from 6% — would also impact STM Lottery’s profitability margin as the company is expected to absorb the additional cost to maintain a low entry cost for punters.

While cash flow from operations (CFO) has declined over the years, standing at RM257.7 million in FY2023, it remains strong relative to the group’s operations. Coupled with a healthy liquidity position with cash balances of RM291.9 million as at end-FY2023 and the back-ended amortisation profile of the MTN programme, STM Lottery has sufficient leeway to meet its financial obligations. Total borrowings comprise RM800.0 million outstanding MTN (and additional RM95.0 million revolving credits) with the MTN reduction schedule commencing in 2029 (RM100.0 million), thereafter in 2030 (RM100.0 million), 2031 (RM200.0 million) and 2032 (RM400.0 million).

The rating agency observes sizeable intercompany loans continue to dominate STM Lottery’s balance sheet; loans due from immediate parent Sports Toto Berhad stood at RM1.1 billion, accounting for 72.0% of STM Lottery’s total assets as at end-FY2023.

The stable outlook reflects MARC Ratings’ expectation that STM Lottery’s credit profile would remain commensurate with the current rating band.

There is no rating upside in the foreseeable future given the prevailing licensing and regulatory risk governing the domestic gaming industry. The prevailing competition in the industry that has impacted the performance of NFOs is also a limiting factor to any upsides.

An event risk in the form of regulatory changes that drastically hamper STM Lottery’s operations could lead to a sudden sharp downward rating migration.