NFOs earnings to take a hit from FMCO closures

NFO outlets nationwide have been temporarily closed and draws have been cancelled since June 1 under the 1st phase of the FMCO 

by NUR HAZIQAH A MALEK / graphic by TMR 

NUMBER forecast operators’ (NFOs) earnings will be negatively affected by the Full Movement Control Order (FMCO) and cancellation of draws and average sales. 

CGS-CIMB Equity Research analysts Foong Choong Chen and Sherman Lam Hsien Jin noted that NFO outlets nationwide have been temporarily closed and draws have been cancelled since June 1 until at least mid-July under the first phase of the FMCO. 

“It is unclear when NFO operations will be allowed to resume. We conservatively assume this will be from mid-September under Phase 3, considering the two-week extension for Phase 1, which involves the transition from the positive list to a negative list approach in which all economic activities are allowed except for activities that are at high risk for Covid-19 infections,” they wrote. 

The cancellation of an additional 52 draws for the current calendar year 2021 on top of already 18 cancelled draws for Magnum Bhd and Berjaya Sports Toto Bhd’s (BToto) outlets for MCO 2.0 expected severe earnings for these NFOs. 

They added BToto’s FY6/21-22F core earnings per share (EPS) was lowered by 12.3% to 28.5% and Magnum’s FY21F core EPS by 61.4%. 

“We cut BToto’s FY21F dividend per share to 11 sen which is 80% payout to be conservative before reverting to 12.4/17.3 sen in FY22F/23F which is 95% payout. 

“Magnum’s FY21F dividend per share would cut to 3.3 sen before being restored to 15.8/16 sen in FY22F/23F which is 95% payout throughout,” they wrote. 

The research outfit added that NFO revenues are set to ease in 2Q21. 

“Hence, if prize payout (high in 1Q21) does not normalise, earnings may drop further for BToto or slip into a slight core net loss for Magnum QoQ. 

“We then see wider core net losses in 3Q21 for both operators due to 2.5 months of FMCO closures till mid-Sep,” the research house wrote. 

A return to core net profits in 4Q21 is expected on a full quarter of operations and a quick NFO sales rebound where sales returns to 60%-70% and 80%-85% of pre-Covid levels. 

“We expected dividend per share of three sen for BToto in the fourth quarter of 2021 and nil for Magnum’s 2Q21,” they wrote. 

CGS-CIMB reiterated its ‘Over-weight’ rating on the gaming sector and still prefers Magnum to BToto. 

“Key rerating catalyst is the full NFO sales recovery post-Covid-19, and we prefer Magnum given its pure NFO exposure and the potential monetisation of its stake in U Mobile Sdn Bhd. 

“Downside risk includes further Covid-19 waves,” they wrote. 

They added the estimation that every extra month of FMCO closures beyond the base case of 3.5 months would cut BToto’s and Magnum’s FY22/FY21 core earnings per share by 12% and 48% respectively, while the discounted cash flow-based fair value by 0.6% and 0.7% respectively. 

In the detailed individual reports, BST is reiterated with its ‘Add’ rating but its DCF-based target price (TP) has been cut slightly to RM2.25. 

For Magnum, its ‘Add’ rating has also been reiterated, but its TP has been cut slightly to RM2.30.