KUALA LUMPUR: Hong Leong Investment Bank's (HLIB) research has downgraded Sports Toto Bhd's stock and cut its core net profit forecasts for the company, after half year results came in below expectations.
Second quarter ended Dec 31, 2023 and half year 2024 results were 38 per cent and 42 per cent of HLIB research and concensus estimates respectively.
The group's 2Q24 core net profit amounted to RM29 million, representing a decrease of 52.7 per cent quarter-on-quarter (QoQ) and 48.1 per cent year-on-year (YoY).
This brings the sum for the first half year ended Dec 31, 2023 (1HFY24) to RM90.5 million, down by 30.9 per cent YoY.
"The negative deviation was due to lower-than-expected revenue and higher-than-expected operating cost. "The weak performance during the quarter was due to lesser number of draws, higher prize payout as well as creeping operating costs," HLIB Research said in a note.
As such, the investment bank has cut its financial year 2024-2026 (FY24-26) forecasts by 13 per cent to 20 per cent, mainly as it impute lower revenue assumption, while at the same time raising its cost projections.
HLIB Research has downgraded Sports Toto's rating to "Hold" from "Buy" previously, with a lower target price of RM1.57 from RM1.86 earlier. On outlook, the investment bank is less optimistic over H.R. Owen Plc's (H.R. Owen) prospects, as it think its car sales will continue to be affected by high financing costs in the UK, while at the same time juggling higher depreciation and operating costs.
"Management has indicated a positive sales momentum for draws during the Chinese New Year, surpassing pre-pandemic levels in terms of sales per draw," it noted.
Separately, HLIB research also said Sports Toto plans to initiate discussions with the Ministry of Finance to arrive at a more agreeable resolution regarding the sales and service tax (SST) hike, aiming to mitigate its impact.
However, it said the group plans to temporarily absorb the additional tax burden until a resolution is achieved, and this is expected to exert pressure on margins in the interim.