Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on March 5, 2018

Berjaya Sports Toto Bhd
(March 2, RM2.26)
Maintain buy with a target price (TP) of RM2.80:
Berjaya Sports Toto’s (BToto) 88%-owned Berjaya Philippines, which is listed on the Philippine Stock Exchange, released the following announcement: On Feb 23, Berjaya Philippines’ subsidiary, Philippine Gaming Management Corp (PGMC), received a final award decision issued by the Arbitral Tribunal which ruled that PGMC did not have an exclusive contractual right to supply an online lottery system for Luzon territory.

 

The Arbitral Tribunal also ordered PGMC to pay all of Philippine Charity Sweepstakes Office (PCSO), the lessee of PGMC for lottery system, reasonable costs and expenses in the arbitration, which amounted to 53.6 million pesos (RM4.03 million), and to reimburse PCSO US$200,000 (RM780,000), which PCSO paid as advance on costs.

To recap, the Regional Trial Court of Makati on Aug 10, 2017 issued a Writ of Preliminary Injunction against PCSO. The writ restrained PCSO from conducting or continuing with the public bidding process and from performing any act that will violate the PGMC’s right as exclusive supplier/lessor of lottery equipment to PCSO insofar as the Luzon territory is concerned.

PGMC will appeal all the aspects of the award and argue that more than 10 years of exclusivity as acknowledged by PCSO should prevail in determining the award, and that the compensation structure which accords PGMC with a share of all lottery revenue from Luzon does not permit any third-party supplier of lottery equipment to share the revenue arising from Luzon that is contractually provided for PGMC.

We make no changes to our earnings forecasts for now as PGMC will appeal the Arbitral Tribunal’s decision and we note that PGMC’s licence remains valid through to Aug 21, 2018. We estimate the Philippine number forecast operator (NFO) division to contribute 10% to 15% of BToto’s earnings in 2018-2019.

BToto’s yield will not be affected. In the worst-case scenario — PGMC is not able to get its licence renewed post August 2018 — BToto’s dividends will not be impacted, having never been dependent on Berjaya Philippines’ cash flows. We understand that BToto has never repatriated Berjaya Philippines’ retained earnings as that would have incurred repatriation taxes, but instead, it prefers to reinvest Berjaya Philippines’ cash. Maintain “buy” and discounted cash flow-based TP of RM2.80, which implies 13.2 times FY18 price-earnings ratio. Valuation drivers are attractive prospective yields of 7.5% to 7.9% in FY18-FY19, backed by stable NFO ticket sales in Malaysia. — UOB Kay Hian, March 2

 

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