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MARC has assigned an AA- preliminary rating to Sports Toto Malaysia Sdn Bhd’s (Sports Toto) proposed Medium Term Note Programme (MTN) of up to RM800 million with a stable outlook. The rating is premised on the reliability of Sports Toto’s cash flow from its number forecast operations (NFO), its leading and entrenched market position in the oligopolistic NFO gaming industry and modest capital expenditure requirements. Moderating these positives are the company’s historically high dividend payouts and substantial amounts owing to Sports Toto by its immediate holding company which account for 75.4% of its current assets as of April 30, 2009. MARC believes that the aforementioned would give rise to credit linkages between Sports Toto and its immediate holding company. The stable rating outlook incorporates MARC’s expectation that Sports Toto’s cash flow stability, which underpins its strong historical financial performance, will continue in the medium term.

A wholly-owned subsidiary of Bursa Malaysia-listed Berjaya Sports Toto Berhad (BToto), Sports Toto is one of a select few gaming operators in the country licensed to operate NFO draws. Although the gaming licence is exposed to the risk of non-renewal on an annual basis, this is somewhat mitigated by Sports Toto’s longstanding track record in the gaming sector and the sizeable tax it pays on its earnings in common with other NFO players.

As of December 31, 2009, Sports Toto remains the market leader with a share of 41.1% in terms of NFO gaming sector revenue compared to its nearest rival Magnum Corporation Bhd, which has a 36.4% share, and Tanjung Bhd’s 22.5% share. Notwithstanding the relatively high degree of regulation in the domestic gaming sector, MARC notes Sports Toto’s success in reconfiguring its games to offer higher prizes. MARC believes that Sports Toto will be able to sustain its competitive position in the near- to medium-term on the strength of its market knowledge and operations expertise.

Sports Toto has a track record of generating consistent levels of earnings and cash flow from operations. While its operating margin has declined in recent years as a result of higher  prize payments made in the
respective years, its FY2009 pre-tax profit of RM557.7 million has recovered to pre-FY2008 levels. Sports Toto’s steady generation of operating  cash flow well exceeds its internal needs, allowing the company to
reduce its debt and to pay out much of its cash flow in the form of dividends. Total dividend paid by Sports Toto amounted to RM1.8 billion over the last five years compared to total profit after tax (PAT) generated over the period amounting to RM2.0 billion.

MARC notes that Sports Toto’s debt burden has been on the decline; its gearing ratio dropped below 1.0 times as of October 31, 2009. Assuming the full RM800 million issuance, Sports Toto’s pro-forma debt-to-equity (DE) as at October 31, 2009 would increase to 1.77 times. As in the past, the planned utilisation of issuance proceeds suggests continued parent company reliance on Sports Toto’s borrowing capacity. Part of the notes issuance proceeds will be used to refinance its immediate holding company debt. MARC notes that as at October 31, 2009, amounts due from BToto stood at RM647.4 million, or 66.8% of the value of Sports Toto’s balance sheet assets.

MARC expects Sports Toto’s operating cash flow to continue to track its earnings, which in turn is expected to remain steady in FY2010. However, Sports Toto’s strong debt service coverage levels in recent periods are expected to decline as a result of increasing annual debt service with the proposed notes issuance. Sports Toto is expected to continue its policy of paying substantially all of its operating cash flow after debt service in dividends to its immediate holding company, BToto. Nonetheless, MARC opines that the company’s strong operating cash generating ability should enable it to maintain reasonable covenant headroom vis-à-vis its minimum required DSCR of 1.50 times.

Major Rating Factors

Strengths

• Leading market position in the oligopolistic NFO gaming segment with the largest domestic network of outlets;
• The company’s good operating track record underpinned by market knowledge and operations expertise; and
• Strong and reasonably predictable cash flow generation.

Challenges/Risks

• Consistently high dividend payout to holding company level restricts cash flow retention;
• Financial demands from immediate holding company and significant exposure to inter-company loans; and
• The risk of non-renewal of NFO licence.

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