MARC has affirmed its rating of AA- on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) RM800.0 million Medium-Term Note Programme (MTN) with a stable outlook. The affirmed rating reflects Sports Toto’s strong cash flow generation from its Numbers Forecasting Operations (NFO) and entrenched market position in Malaysia’s gaming sector. The rating is moderated by significant regulatory risk that domestic gaming companies are exposed to and Sports Toto’s balance sheet structure which is characterised by low cash retention as well as sizeable intercompany loans to its holding company, Berjaya Sports Toto Berhad (BToto).

Sports Toto remains a major player in the oligopolistic domestic NFO gaming segment with 676 outlets nationwide and seven variations of games as at end-April 2014. MARC notes that the company has a long operating track record since 1969 in the gaming industry, which may mitigate gaming licensing renewal risk. Nonetheless, given the stringent regulatory environment of the gaming sector, Sports Toto’s financial performance is susceptible to changes in the gaming tax regime or shift in government policy on licensing. The impending implementation of the Goods and Services Tax (GST) on April 1, 2015 could also potentially weigh on the company’s earnings. The rating agency understands that the NFO operators have collectively submitted a proposal to the government to mitigate the impact of GST on their earnings.

For financial year ended April 30, 2014 (FY2014), revenue growth was flat at RM3.4 billion, reflecting the stiff competition in the gaming industry as well as from alternative betting channels. Sports Toto’s pre-tax profit declined by 11.5% year-on-year (y-o-y) to RM497.3 million (FY2013: RM561.7 million), largely attributed to higher prize payouts. Cash flow from operations (CFO) declined to RM336.7 million (FY2013: RM379.9 million), while CFO interest coverage remained strong at 11.3 times despite a y-o-y decline (FY2013: 12.1 times). The rating agency notes that the amount due from the holding company continues to be a recurrent feature of Sports Toto’s balance sheet, accounting for 53.4% of its total assets of RM1.2 billion in FY2014 (FY2013: 68.6%; RM1.4 billion). Dividend payout was high at RM562.3 million (FY2013: RM188.5 million), which largely contributed to a sharp decline in free cash flow to negative RM266.5 million in FY2014 (FY2013: positive RM169.1 million).

MARC notes that Sports Toto issued RM180.0 million MTNs in FY2014, the proceeds of which were utilised to repay RM150.0 million maturing MTNs under the rated programme. The company has issued a further RM295.0 million in 1QFY2015. Apart from the outstanding RM695.0 million MTNs, Sports Toto has no other borrowings as at end-August 2014. The next maturity of RM200.0 million notes is due in mid-2015. In addition to the company’s cash balance of RM348.6 million as at end-April 2014, Sports Toto has the financial flexibility to roll over the upcoming maturing notes under the rated MTN programme which ends in June 2020.

The rating agency notes that BToto had cancelled plans to list Sports Toto as a business trust on the Singapore Stock Exchange, citing poor capital market conditions. Following the cancellation, the company’s corporate structure and the rated programme’s security features have reverted to its pre-listing structure. The action has had no impact on the rating of the MTN programme.

The stable rating outlook is premised on MARC’s expectations that the company’s credit profile will remain in line with the current rating band. However, downward rating pressure could develop should regulatory changes in the gaming industry affect the company’s business prospects or if there is a material weakening in the company’s liquidity position. 
 
Contact:
Jasmine Kua Siew Fen +603-2082 2280/ jasmine@marc.com.my.