The odds for them hinge on the outcome of the elections in three of the six states in the coming months.
If Penang, Selangor and Negeri Sembilan get swept up by the green wave, the future for the NFOs will be bleak.
Perikatan Nasional is likely to retain the remaining three states of Kelantan, Terengganu and Kedah, but it matters little to the NFOs given that one of them, Kedah, has already outlawed gaming while there is little of such activities in the other two states given the strict Islamic backdrop.
The potential impact on earnings for NFOs already has analysts fretting.
Maybank Investment Bank analyst Yin Shao Yang said about 50% of earnings for players such as Sports Toto Bhd and Magnum Bhd would be at risk if PN wins the three west coast states.
Kedah has already shut down all 45 NFO outlets.
In a note on May 24, Public Investment Bank analyst Eltricia Foong noted that sentiment had been “adversely affected” by policy changes since the 15th general election on Nov 19, 2022.
However, Yin told FMT Business, Genting Malaysia Bhd (GenM), whose business is solely in operating a casino, “would likely be less affected”.
How the numbers will play out
Almost all major NFOs have more outlets in Selangor than any other state. Sports Toto has 144 (21.9% of its total), Magnum has 85 (18%) and Pan Malaysian Pools Sdn Bhd, which operates Da Ma Cai, has 78 (23.6%).
Should all outlets in Selangor, Penang and Negeri Sembilan be shut down on Jan 1, 2024, Sports Toto will see a 52% drop in earnings while Magnum will suffer a 48% cut.
The odds against Sports Toto are highest. All it takes is for Selangor to fall to PN for the Berjaya Group gaming unit to see its earnings decline by 33%, Yin said.
Magnum will see a 26% drop in earnings if it is forced to close its outlets in Selangor.
Both companies are already facing stiff competition from illegal lottery operators that offer higher payouts and an online platform.
However, Yin told FMT Business, little can be done to stop PN from closing down gaming outlets if they win in these key states.
“There may be some remedial measures, such as moving to KL or other states, but that will not completely make up for (the loss),” he said.
Competition in Kuala Lumpur will intensify. One way out for NFOs is to seek a licence to operate online, but Yin feels it is unlikely to be granted.
Nonetheless, some NFOs have diversified to widen their revenue base. Sports Toto has British luxury car dealership HR Owen in its stable.
HR Owen is a retailer for the Rolls-Royce, Bentley, Ferrari, Aston Martin, Maserati, Lamborghini and Bugatti brands.
However, its contribution to Sports Toto’s earnings remains relatively small. HR Owen’s pre-tax profit for the first nine months of its current financial year was only RM15.8 million, a long way off the RM226 million brought in by the lottery business.
“(A focus on other segments) won’t be meaningful, as it won’t compensate for (setbacks in) the NFO business,” Yin said.
Cards stacked against NFOs?
Even if NFOs are allowed to continue operating, there are few positives for the industry.
Yin said they would have to match the dividend payout they promised despite having failed to do so after being forced to keep their outlets closed during the Covid-19 pandemic.
Sports Toto announced an interim dividend of 2 sen per share for Q3 2023, a 7% yield that Foong described as “still attractive”. She said it is sustainable given its cash balance of RM600 million.
Assuming a payout of 60% for FY2023, Sports Toto would have to fork out around RM110 million for dividend distribution.
However, Yin pointed out that the group typically had a payout ratio of over 75%.
RHB Investment Bank analysts Lee Meng Horng and Jim Lim said Magnum lacked catalysts.
Magnum announced a dividend of a sen per share for the first quarter ended March 31, 2023 implying a 91% dividend payout ratio. Lim and Lee acknowledged this was comparable with the 74% to 99% payout ratio pre-pandemic.
Nonetheless, what ultimately happens to NFOs will likely come down to the wire.