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. 

STM Lottery’s entrenched domestic market position as a number forecast operator (NFO), its lengthy operating track record and strong cash flow generating ability relative to debt obligations remain key rating drivers. STM Lottery has the largest number of outlets in the domestic oligopolistic gaming industry. The rating is moderated by the company’s exposure to licence renewal risk and its high susceptibility to regulatory changes in the domestic gaming industry. 

During financial year ended June 30, 2022 (FY2022), STM Lottery had lower number of draws of 138 (FY2021: 157) which contributed to a 5.3% y-o-y revenue decline to RM2.1 billion. The lower number of draws was due to the pandemic-induced closures of its outlets. At the same time, STM Lottery and other NFOs have continued to face stiff competition from online and illegal gaming operators. We view the recent announcement by the government to reduce the number of special draws from 22 to 8 per year would result in lower revenue generation for NFOs; however, given special draws have lower margins, the impact on profitability would be modest. 

Cash flow from operations (CFO) declined to RM174.6 million (FY2021: RM237.3 million), due to higher prize payout during the year. STM Lottery maintains a strong liquidity position as reflected by cash position of RM251.7 million as at end-FY2022. It has tax and dividend payables amounting to a combined RM103.4 million over the near term. The rating agency observes sizeable intercompany loans continue to dominate STM Lottery’s balance sheet; loans due from immediate parent Sports Toto Berhad (formely known as Berjaya Sports Toto Berhad (SPToto) stood at RM1.1 billion, accounting for 74.0% of STM Lottery’s total assets as at end-FY2022. 

Total borrowings comprise RM800.0 million outstanding MTNs and RM50.0 million revolving credits. We expect borrowings to remain flat and any reduction will follow the MTN programme reduction schedule, beginning in 2029 (RM100.0 million) and thereafter in 2030 (RM100.0 million), 2031 (RM200.0 million) and 2032 (RM400.0 million).

The stable outlook incorporates MARC Ratings’ expectations that STM Lottery’s credit profile would remain in line with the current rating band. 

Upside scenario 

There is no rating upside in the foreseeable future given the company’s exposure to licensing risk and industry risk from the prevailing competition in the domestic gaming industry that has impacted licensed domestic NFOs.

The rating would be lowered on changes in the domestic gaming regulations and/or occurrences of material events that impact ongoing operations.