Press Releases MARC AFFIRMS AA- RATING ON SPORTS TOTO MALAYSIA SDN BHD’S MEDIUM-TERM NOTES (IMTN) PROGRAMME; OUTLOOK STABLE

Friday, Nov 27, 2015

MARC has affirmed its rating of AA- on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) RM800.0 million Medium-Term Notes Programme (MTN) with a stable outlook. The rating is primarily driven by Sports Toto’s strong cash flow generation from its Numbers Forecasting Operations (NFO) and its entrenched market position in the domestic gaming industry. The rating is constrained by the periodic licensing requirement that poses a significant regulatory risk. In addition, the low cash retention at Sports Toto and sizeable intercompany loans to its holding company, Berjaya Sports Toto Berhad (BToto) remain moderating factors.

Sports Toto remains a major player in the oligopolistic domestic NFO gaming sector; it has 676 outlets nationwide and offers seven game variations as at end-April 2015 (FY2015). The gaming company’s 47-year domestic operating track record partly mitigates its annual license renewal risk. Sports Toto’s expansion and prize payout policies are also governed by stringent regulations on the gaming sector. Additionally, its financial performance remains susceptible to changes in the highly taxed sector. Its margin, which is under pressure from the current tax regime, has been further affected by the absorption of the Goods and Services Tax (GST) since April 1, 2015. MARC estimates the company’s margin to reduce by up to 2% for fiscal 2016.

For FY2015, Sports Toto’s revenue declined by 4.3% y-o-y to RM3.2 billion, reflecting the prevailing stiff competition in the legalised gaming segment. In addition, the gaming company has to contend with competition from alternative betting channels. Sports Toto’s pre-tax profit declined by 4.0% y-o-y to RM477.2 million, largely attributed to the rise in operational and administrative costs. Correspondingly, cash flow from operations (CFO) declined marginally to RM326.6 million (FY2014: RM336.7 million). This notwithstanding, CFO interest coverage remained strong at 9.8 times, although this measure has been on a declining trend over the past five years.

The rating agency notes a recurrent feature of Sports Toto’s balance sheet is that the amount due from the holding company continues to be high, accounting for 65.1% of its total assets of RM1.23 billion in FY2015 (FY2014: 53.4%; RM1.18 billion). Dividend payout was lower at RM382.6 million (FY2014: RM562.3 million), which contributed largely to a reduction in the negative free cash flow to RM56.0 million in FY2015 (FY2014: negative RM266.5 million).

MARC notes that Sports Toto issued RM295.0 million MTNs in 1QFY2015, proceeds of which were largely utilised to repay RM180.0 million maturing MTNs under the rated programme. Apart from the outstanding RM695 million MTNs, Sports Toto has no other borrowings as at end-September 2015. The next maturity of the RM55.0 million notes is due in mid-2016. In addition to the company’s cash balance which stood at RM278.8 million as at end-April 2015, Sports Toto has the flexibility to roll over the upcoming maturing notes under the rated MTN programme up to the allowable limits until the expiry of the programme in June 2020.

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 pressures 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.


Contacts:
Cheah Wan Kin, +603-2082 2232/ wankin@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.