MARC has assigned an AA- 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.
In a statement on Monday, June 14, MARC said moderating these positives were 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," it said.
The rating agency said as of Dec 31, 2009, Sports Toto remained 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," it said.
The agency said Sports Toto has a track record of generating consistent levels of earnings and cash flow from operations.
It also said 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.
The total dividends 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 billion, it said.
MARC said it 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, it said.
"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 (debt-service coverage ratio) of 1.5 times," it said.
Written by MARC
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