Fortune remains laggard for NFO players as margins dip


NUMBER forecast operators (NFOs) expect to remain in laggard territory due to lower gross sales and margins, although NFOs were awarded 22 special draws for calendar year 2021 (CY21), which will likely fail to enhance earnings.

Maybank Investment Bank Bhd analyst Yin Shao Yang noted that gross NFO sales for special draws (held on Tuesdays) are 10%-20% lower than that of normal draws (held on Wednesdays, Saturdays, Sundays) because they are held close to the Wednesday normal draws.

“Special draw net margins are also a lot lower than that of normal draws (8%-9%) as the former attracts the 10% of sales less gaming tax special contribution to government. Thus, the 22 special draws are unlikely to materially boost NFO earnings,” he said in a report recently.

Yin estimates that the fourth quarter of 2020 (4Q20) industry jackpot sales grew 3% quarter-on-quarter to RM8.7 million.

“At first glance, the aforesaid does not seem meaningful but on closer inspection, we were positively surprised the growth came despite a surge in new Covid-19 cases in Malaysia in 4Q20.

“Channel checks inform us that most gross NFO sales (Classic 4D, jackpot and other games) have improved from 80%-85% of pre-Covid-19 levels as at end-3QCY20 to 85%-90% of pre-Covid-19 levels as at end-4QCY20,” he said.

He added that if the number of new cases in Malaysia subsided, the possibility of the aforesaid ratio will trend even higher.

He noted that it also helps that the government is finalising its national vaccination plan soon, providing the vaccines for free, with a target of 80% of the population or 26 million people in the long run.

“As we observe that most punters at NFO outlets are above 40 years of age, in a strange but positive way, we gather that most of the NFOs’ clientele will be vaccinated first.

“This will probably allay most punters’ fears of contracting Covid-19 by visiting NFO outlets and help narrow any remaining gap between pre- and post-Covid-19 gross NFO sales this year,” he said.

The firm has raised its CY21E industry gross NFO sales/draw growth forecast to +5% YoY from -5% YoY and upgraded Magnum Bhd and Berjaya Sports Toto Bhd (BToto) to ‘Buy’ from ‘Hold’.

“We believe our revised CY21E forecast is not overly bullish as it is still 10% less than the CY19A level (20% less previously). We also maintain our CY22E industry gross NFO sales growth forecast at +2% YoY,” added Yin.

Magnum’s financial year 2021 forecast FY21E and FY22E core earnings per share (EPS) were raised by 13%, less than that of BToto at 2%-19%, as it was raised previously during the 22 special draws in CY21.

Consequently, Magnum’s target price based on discounted cashflow was raised by 12% to RM2.51, while BToto by 23% to RM2.40.