Illegal Operators Still Cloud Outlook For Lottery Sector

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OF the two companies under RHB’s coverage that reported results between April and June, one was in line while the other exceeded their expectations. 
Magnum’s (MAG) results were ahead of forecasts, while Sports Toto’s performance met expectations. MAG’s better earnings stemmed from lower prize payouts and a substantial saving in interest expenses. 
“We remain Neutral on the sector,” said RHB. RHB expects the second half of 2025 (2H25) to remain challenging, with trading conditions weighed down by persistent illegal lottery activities that continue to erode market share from legal operators. 
Lottery game sales per draw for both SPTOTO (MYR16-18 mil) and MAG (MYR13-14 mil) have normalised this year, with the quarter three 2025  (3Q25) surge above MYR20 mil for the former happening on the back of extraordinary jackpot prize rollovers that temporarily boosted player participation. 
Meanwhile, the sector’s earnings momentum should remain highly sensitive to the luck factor and any potential government policy shifts on enforcement against illegal number forecast operators (NFOs).

SPTOTO’s gaming sales are anticipated to improve in the coming quarter, supported by the recent MYR78 mil accumulated Supreme Toto 6/58 Jackpot pool (won on 20 Aug). 
Meanwhile, HR Owen sales should also improve slightly, with the commencement of the September car plate campaign in the UK.
Nonetheless, distributorship margins are likely to remain under pressure, from persistently high operating costs and depreciation from recent land acquisitions in the UK.
Despite the car plate month event in September, SPTOTO subsidiary HR Owen is expected to still encounter challenges due to weak economic conditions, high inflation, and elevated interest rates in the UK.
However, as SPTOTO mainly relies on its lottery operations to finance dividend payments, these issues at HR Owen are unlikely to materially affect its dividend distributions.
MAG’s 6.3% stake in U Mobile currently has a book value of MYR385.4 mil. With U Mobile targeting an IPO valuation of MYR10 bil, the value of MAG’s stake could rise to MYR633 mil – which may provide an additional 12% upside to our target price.

We regard the at-mean market valuation of NFOs as fair, as it reflects their defensive nature and the limited growth catalysts, while they offer attractive dividend yields of 6-8%. We like SPTOTO for its compelling valuation and superior dividend yield. 
It also is a top choice for investors seeking high income stability in the midst of an environment bringing limited upside from growth drivers in the sector – which makes this counter a strong defensive pick.
Key downside risks include unfavourable luck factor and policies, as well as softer-than-expected ticket sales. The converse represents upside risks. — Focus Malaysia

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