This article first appeared in The Edge Financial Daily on December 20, 2018

Berjaya Sports Toto Bhd
(Dec 19, RM2.13)
Maintain hold with a lower target price (TP) of RM2.45: Berjaya Sports Toto Bhd’s (BToto) second quarter of financial year 2019 (2QFY19) core net profit of RM60.7 million (-2% year-on-year [y-o-y], -31% quarter-on-quarter [q-o-q]) was within our expectations at 23% of our financial year estimate.

While cumulative six months of financial year 2019 (6MFY19) core net profit of RM148.4 million (+11% y-o-y) was above our expectations at 55% of our financial year estimate, this was due to strong first quarter of financial year 2019 (1QFY19) core net profit which was driven by the goods and services tax-free period (about RM8 million) and low estimated prize payout ratio of 58% which should not recur.

2QFY19 dividend per share (DPS) of four sen brought 6MFY19 DPS to eight sen which was in-line at 50% of our financial year estimate.

Recall that we estimated that Sports Toto Malaysia’s (STM) 1QFY19 gross numbers forecast operations (NFO) revenue/draw fell 4% y-o-y due to the Fifa World Cup.

Despite the passing of the Fifa World Cup, we estimate that STM’s 2QFY19 gross NFO revenue/draw still fell 4% y-o-y.

Recall that 2QFY18 gross NFO revenue/draw grew 4% y-o-y thanks to strong “Grand Toto 6/63” sales as its jackpot hit at an all-time high of RM69.6 million on Sept 13, 2017.

Unfortunately, none of STM’s jackpots were as large in 2QFY19.

While the prior year bases will be easier for STM going forward, we still trim our FY19/FY20/FY21E earnings by 2%/5%/4% as we account for the Budget 2019 directive to halve the number of special draws to 11 per year from Jan 1, 2019.

Yet, there is still risk to earnings from 88%-owned Philippine Gaming Management Corp’s (PGMC) equipment leasing agreement with Philippine Charity Sweepstakes Office not being renewed beyond August 2019.

PGMC contributes 10% to 15% to group earnings.

Despite more than 10% upside potential, we retain our “hold” call on BToto as 10% to 15% of its earnings are still at risk from non-renewal of an equipment leasing agreement in the Philippines under 88%-owned PGMC.

We maintain “hold” for a net dividend yield of +7%. — Maybank IB Research, Dec 17