Oct 9, 2012 -
MARC has affirmed its AA- rating
on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) Medium Term Note Programme
(MTN) of up to RM800 million with a stable outlook. The rating action affects
the outstanding RM550 million MTN notes under the programme. The affirmed
rating incorporates Sports Toto’s very strong cash flow generating ability from
its number forecast operations (NFO), its entrenched market position in the NFO
gaming segment in Malaysia, and its significant operational track record.
Moderating the rating are Sports Toto’s historically high dividend payouts
which have restricted cash flow retention and sizeable intercompany loans to
its immediate holding company.
Wholly-owned by Bursa Malaysia-listed
Berjaya Sports Toto Berhad (BToto), Sports Toto is a major player in the
oligopolistic NFO gaming segment with a leading market share of about 40% in
terms of sales generated in the segment. Sales rebounded strongly in the year
under review on the back of the introduction of the 4D Jackpot (4DJP) game, a
variation of its existing 4D game, in June 2011. The strong response to the
4DJP has been instrumental in reversing the weak sales growth experienced in
recent years. MARC views Sports Toto’s ability to offer variations to its games
as the enabling factor for its entrenched market position in the NFO gaming
segment. Nonetheless, Sports Toto operates in a highly regulated environment in
which its financial performance is susceptible to changes in the tax regime
while the annual renewal of its gaming licence exposes the company to
regulatory risk, although this is mitigated by its longstanding operational
track record of over 40 years.
MARC notes that BToto is
undertaking a proposal to divest its entire equity interest in Sports Toto for
RM6 billion to a Singapore incorporated business trust, Sports Toto Malaysia
Trust (STM-Trust) which will be listed on the Singapore Exchange (SGX). MARC is
of the view that the injection into a trust would not have any material impact
on Sports Toto’s earnings profile, and its ability to meet the redemption of
the debt under the rated programme. Part of the proceeds from the trust’s
listing on SGX is expected to be utilised to repay BToto’s intercompany loans
to Sports Toto. As at April 30, 2012, this stood at RM777.6 million. Sports
Toto had drawn down RM550 million under the programme, the bulk of which was
utilised to retire the debt of its holding company, BToto. MARC understands
from the company that BToto has obtained relevant approvals from the Malaysian
regulators and is expected to complete the proposal by early 2013.
For financial year ended April
30, 2012 (FY2012), Sports Toto posted higher revenue and pre-tax profit,
growing by 4.8% year-on-year (y-o-y) and 10.0% y-o-y respectively (FY2011:
0.4%, -10.5 %). The operating profit margin rose to 16.1% in FY2012 (FY2011:
15.3%) owing mainly to lower prize payouts in the year. Sports Toto retains
very strong cash generating ability with cash flow from operations (CFO)
increasing to RM402.9 million in FY2012 (FY2011: RM332.5 million) due mainly to
improved sales and lower payouts. Aside from the outstanding RM550 million MTN
which was issued in FY2011, Sports Toto has no other borrowings. MARC observes
that intercompany loans to BToto have continued to be a recurrent feature of
its balance sheet structure, with the amount due from the holding company
constituting 66.6% (RM777.6 million) of its total assets (RM1,168.4 million).
The unsecured loan is payable on demand.
Sports Toto continues to
maintain a high dividend payout policy; dividends paid in FY2012 amounted to
RM409.0 million or 107.3% of its after-tax profit (FY2011: 148.0%). MARC
expects dividend payouts to be at levels that would allow Sports Toto to preserve
prudent levels of cash to meet its financial obligations under the rated
programme. The first principal repayment of RM150 million is due in June 2013.
Sports Toto’s debt service cover ratio (DSCR) of 24.9 times as at FY2012
(FY2011: 6.12 times) provides comfortable covenant compliance headroom
vis-à-vis the minimum covenanted level of 1.50 times.
The stable rating outlook takes
into consideration MARC’s expectations that the company’s credit profile will
remain in line with the current rating band.
Contacts:
Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;
Rajan Paramesran, +603-2082
2233/ rajan@marc.com.my.
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