RHB Research Corporate Results Review: SOP’s Stellar Results Beat Street’s Forecasts; Continued Ticket Sales Recovery and Strong Motor Segment for Sports Toto

Sarawak Oil Palms – Outstanding Start To The Year; Reiterate BUY

The research house has called for a ‘BUY’ rating on this counter, with a new target price (TP) of MYR7.25 from MYR7.05, which translates to 21% upside with c.3% yield.

Sarawak Oil Palms’ 1Q22 results are above expectations, at 35% of our and 48% of Street full-year forecasts. The company’s minimal forward position was a main factor behind its stellar profit, which enabled SOP to benefit from higher CPO spot prices. Its valuation remains attractive – the stock is trading at 7x FY23F P/E, vs its peer range of 7-10x.

1Q22 earnings are above expectations, at 35-48% of RHB’s and Street FY21 estimates. Core net profit jumped 171% YoY to MYR188m, on higher average palm oil and PK prices of MYR6,308/tonne (+62.4% YoY) and MYR5,128/tonne (+77.5% YoY). This boosted profit significantly, given the company’s sensitivity to any change in CPO prices.

Another quarter passes, but labour shortages remain. FFB growth for 1Q22 was down 13.7% YoY, and this was significantly below our -0.5%YoY projection and management’s flattish guidance for FY22. In 4M22, this decline has worsened to -14.4% YoY. The main culprit – the labour shortage – remains unresolved (the current level was at 30-35% in 1Q22). SOP intends to partly alleviate this issue by reallocating more workers to high-yield areas, as well as hiring contract workers for maintenance and upkeep work. Management believes this shortage will only be resolved in 2H22F. If this is prolonged up to the start of the peak season, SOP may face another round of under-optimisation of its crops. As such, the research house has revised their FY22-24F growth to -4.9% to 9.6% (from -0.5% to 6%).

More decent quarters to come for its downstream segment. Although no disclosures were given, it is believed downstream margins remained robust, given the rising CPO price environment. Also better quarters are expected to come, as its downstream expansion is set to be completed in 2H22 – where the focus is on producing higher-quality, tailored refined products for customers.

Raising the CPO price assumptions per tonne to MYR5,300 (from MYR4,500) for FY22 , and to MYR4,300 (from MYR3,600) for FY23, while the FY24F CPO price remains at MYR3,500. As such, FY22-24F earnings are revised by -18% to 26%.

Reiterate BUY, with a higher TP of MYR7.25 based on 10x 2023F P/E. Its valuation remains inexpensive – this stock is trading at 7x FY23F P/E, at the low end of its peer range of 7-10x. Note that our TP has imputed a 16% ESG discount, to account for SOP’s ESG score of 2.22.

Key risks include an unfavourable CPO price movement, weather risks, as well as demand and supply dynamics of the vegetable oil industry.

Sports Toto Historic Supreme 6/58 Jackpot Run; Keep BUY

THe research house has reiterated ‘BUY’ rating on this counter, new target price (TP) of MYR2.20 (from a previous TP of MYR2.39), 15% upside, c.6% FY23F (Jun) yield. 3QFY22 earnings beat analysts’ forecasts on stronger-than-expected UK dealership sales and margins, although the dividend missed expectations. While ticket sales rebounded strongly during the quarter, it is noted that there was a prolonged jackpot run that supercharged ticket sales to pre-pandemic levels, and are cautious about a potentially slower-than-expected underlying ticket sales recovery. Hence the analysts maintain their rating on Sports Toto for the continued growth of its UK motor dealership and 6% FY23F yield.

Exceeded expectations. 9MFY22 core profit exceeded their expectations at 85% of our full-year estimate, but was within Street’s at 78%. The positive deviation is attributable to the stronger-than-expected contribution from the UK motor dealership segment, owing to the better-than-expected profit margins from the used car segment. Nonetheless, interim DPS of 2 sen brings 9MFY22 DPS to 4 sen – below their FY22F of 8 sen – as the stronger motor segment does not directly lead to dividend payouts.

Results highlights. YoY, 3QFY22 revenue rose 54% on higher gaming (+70%) and motor (+42%) revenue. The jump in gaming revenue was from higher ticket sales, driven by the prolonged Supreme 6/58 Jackpot run that led to a historical high accumulative prize of c.MYR98m. Consequently, gaming EBIT jumped 250%, owing to the operating leverage. On the other
hand, the strong increase in motor revenue, coupled with higher margins from the tight vehicle supply, lifted motor EBIT by 58%.

Continued ticket sales recovery and strong motor segment. Toto ticket sales should continue to gradually recover. However, the analysts are cognisant that this quarter’s ticket sales are not representative of the underlying recovery, as it was distorted by the aforesaid historic jackpot run. Taking a cue from Magnum’s (MAG MK, NEUTRAL, TP: MYR1.95) 1QFY22 results, they believe the underlying ticket sales recovery will take longer than expected, as punters may be financially worse off and/or have increasingly turned to illegal number forecast operators (NFOs). Meanwhile, strong demand for used luxury cars should continue to drive its motor segment’s earnings, as the automotive industry continues to grapple with supply chain issues.

Earnings forecasts. Post results, the research house raised their FY22F core earnings by 3% to account for the stronger-than-expected motor sales and margins. As 9MFY22 DPS fell short of expectations, they lowered FY22F-24F DPS to 6-15 sen from 8-16 sen. To account for the current market sentiment, they have raised the risk-free rate in their DCF calculation. Therefore, they lowered their TP – which includes a 0% ESG premium/discount, based on its 3.00 ESG score – to MYR2.20. They maintain BUY on SPTOTO mainly premised on: i)Continued growth of its UK motor dealership segment and ii) its FY23F 6% yield. Key risks: Gaming taxes/regulations changes and another COVID-19 wave.

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