This article first appeared in The Edge Malaysia Weekly on March 26, 2018 - April 1, 2018
INVESTORS looking for high-yield stocks to add to their portfolios might want to take a look at Berjaya Sports Toto Bhd. Currently priced at RM2.17 per share, the stock offers a dividend yield of 7% — far more than fixed deposits, which offer 2.95% to 4%.
Admittedly, the attractive looking yield has been aided by the fall in its share price over the years, with the decline becoming more apparent in recent times. Between Sept 26, 2016 and March 21, 2018, BToto’s share price lost just under a third of its value to RM2.12. On March 15, the number forecast operator (NFO) hit a five-year low of RM2.08.
While the dividend yield looks attractive on its trimmed share price, the larger question is whether it can be sustained.
It is worth noting that BToto’s core business is in the NFO space with a presence in Malaysia and the Philippines, through listed subsidiary Berjaya Philippines Inc, but it is also involved in the auto retailing business via UK subsidiary H.R. Owen Plc.
NFOs have been hit hard in the last few years for a number of reasons. In 2015, the introduction of the Goods and Services Tax (GST) dented consumer sentiment and reduced disposable income. Consequently, many punters turned to illegal betting syndicates as they believe the payouts are more generous.
“GST is not so much of a problem now ... What is a problem now is the rampant illegal betting syndicates. That is not to say that they were not around before GST was introduced, but I believe it exacerbated the problem,” says an analyst with a local research house.
The size of the illegal NFO market is estimated at about 1 to 1.5 times the legal segment, with the former dishing out theoretical prize payout ratios of up to 85% compared with the latter’s 62%.
The highly regulated legal NFOs are saddled with several taxes: a gaming tax of 8%, which is levied on gross sales, and an 8% pool betting duty on net sales. They also contribute 10% of their pre-tax profit to the National Sports Council, and there are corporate taxes as well.
More recently, BToto’s earnings appear to be more stable, which bodes well for the company.
Kenanga Research says in a report that the slightly lower ticket sales in the third quarter ended Jan 31, 2018 (3QFY2018) is not cause for concern because sales momentum looks good.
“In fact, similar to its peer, Magnum Bhd, BToto registered improved luck factor and ticket sales in the past year, which is a good sign,” the report says.
BToto’s net profit of RM59.23 million for the third quarter was below analysts’ expectations, but was nearly a quarter more than the RM47.94 million posted in the same period last year.
The increase in revenue was more tepid, rising 2.7% to RM1.4 billion — the result of higher revenue contribution from H.R. Owen but offset by lower revenue from Sports Toto Malaysia Sdn Bhd and Philippine Gaming Management Corp (PGMC).
BToto’s operations in the Philippines contributed 15% of its pre-tax profit, but a potential setback is an appeal against the final award decision by the Arbitral Tribunal. The appeal relates to an exclusive contractual right by PGMC — a subsidiary of Berjaya Philippines — with Philippine Charity Sweepstakes Office (PCSO) to supply the online lottery system for Luzon.
PGMC supplies and maintains a computerised online lottery system and software support for PCSO in the Luzon region.
The final decision by the Arbitral Tribunal, on Feb 23, ruled that PGMC did not have an exclusive contractual right to supply the online lottery system for the Luzon territory. It also ordered PGMC to pay all of PCSO’s costs and expenses incurred in the arbitration of some RM4.03 million, in addition to RM780,000 in reimbursement which PCSO paid as an advance on costs.
“PGMC will appeal all aspects of the award and argue that more than 10 years of exclusivity, as acknowledged by PCSO, should prevail in determining the existence of an exclusive relationship and the award, and that the compensation structure, which accords PGMC a share of all lottery revenue from Luzon, does not permit any third-party supplier of lottery equipment to reduce or share in the revenue arising from Luzon that is contractually provided for PGMC. PGMC is confident that it will prevail on appeal,” Berjaya Philippines said in a statement.
Notwithstanding the decision, most analysts agree the attractive yield makes the stock worth considering. Moreover, it is trading at an attractive 10 times price-earnings ratio.
On Bloomberg, there are currently eight “buy” and four “hold” calls with an average target price of RM2.62.
“BToto’s earnings will be steady and any major changes will depend on whether there is an improvement in consumer confidence. But as of now, the attractive yield is commensurate with the risks,” says an analyst.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.