This article first appeared in The Edge Financial Daily on June 22, 2017

Berjaya Sports Toto Bhd
(June 21, RM2.55)
Maintain a hold call with a lower target price of RM2.80: Berjaya Sports Toto Bhd’s (BJToto) registered fourth quarter, financial year 2017 (4QFY17) revenue was RM1.5 billion, down 0.5% year-on-year (y-o-y), while core net earnings dropped 38.3% y-o-y to RM70.4 million.

This brought its full-year core net profit (after stripping out non-recurring items) to RM261.1 million, making up 98.4% of our and 96.6% of Bloomberg’s consensus full-year forecasts. This was broadly in line with expectations.

The group declared a final dividend per share (DPS) of 3 sen (versus 4QFY16’s DPS of 5 sen), bringing the full-year DPS to 14 sen. This translates into a full-year payout ratio of 72%, which missed expectations and made up 82% of our full-year DPS estimate of 17 sen.

Sport Toto Malaysia Sdn Bhd (STM), BJToto’s principal number forecasting operating (NFO) business, saw the financial year 2017 (FY17) revenue fall 1.7% y-o-y while pre-tax profit declined by a bigger quantum of 19.9% y-o-y.

Along with the competition overhang from illegal NFOs and weaker consumer sentiments which hit sales, STM’s profitability was also dragged down by a higher prize payout as well as increased operating expenses. We estimate the FY17 prize payout ratio was 73% (versus FY16’s 71%).

Meanwhile, H R Owen plc (a luxury car distributor and 72%-owned subsidiary of BJToto’s Philippine subsidiary) reported a revenue increase of 8.3% y-o-y to RM2.3 billion while the pre-tax profit jumped to RM15.9 million (up 59% y-o-y). This was mainly attributed to higher sales volume of cars on the back of new model launches during the year, which partially offset the unfavourable forex translation impact (from the British pound to the Malaysian ringgit).

After incorporating FY17’s full-year numbers, we lower our FY18-FY19 forecast earnings per share (EPS) by 8.8%-9.3% to account for lower sales per draw assumptions as well as higher operating costs.

The structural issues surrounding the NFO industry seem to be worsening, and the apparent lack of enforcement and clampdown on such illegal activities remain a major concern, in our view. We remain cautious on the group’s ability to sustain its dividend payout in the midst of declining sales and fluctuating luck factor.

Upside risks to our call include lower-than-expected prize payout ratios and better-than-expected dividend payout, while downside risks include further proliferation of illegal gaming operators and worsening NFO sales. — CIMB Research, June 20