This article first appeared in The Edge Financial Daily on April 9, 2019
Berjaya Sports Toto Bhd
(April 8, RM2.62)
Maintain outperform with a higher target price (TP) of RM2.95: Despite gaining strongly by 25% year to date (YTD), we still see value in Berjaya Sports Toto Bhd (BToto) on potential upticks in ticket sales, mainly driven by the authorities actively clamping down on illegal operators. In fact, sin stocks are in the spotlight as investors search for yielding stocks. Another positive is BToto is the cheapest sin stock with the highest dividend yield among peers. Our “outperform” rating for the stock remains and it’s our top pick for our second quarter of 2019 (2Q19) strategy at a revised TP of RM2.95.
Last Friday, we met with management for updates concerning ticket sales, which saw upticks in the past two quarters. Management is excited as enforcement against illegal operators, started last September, has resulted in customers switching to licensed operators as rival Magnum Bhd — with an “outperform” rating and TP of RM2.50 — also experienced a similar trend in previous quarters.
We understand that illegal operators had evolved to operate in physical shops — the target of enforcement, especially in the Klang Valley. Since then, BToto saw ticket sales for its Classic 4D rising 5% — fairly encouraging. The enforcement is healthy for the number forecast operators (NFOs) as the black market’s size is easily one to two times bigger than the licensed NFOs’ volumes.
While the local NFO contributed more than 80% of the group’s pre-tax profit, earnings from Philippine-based Philippine Gaming Management Corp (PGMC) and UK unit HR Owen (HRO) could be volatile. In fact, PGMC’s pre-tax profit fell to RM5.2 million in 3Q19 from RM22.7 million in 2Q19, owing to a lower leased rental income as the contract for the lottery system machine expired last August. As such, in the interim, PGMC continues to receive a lower rental income until a new contract is sorted.
Earnings from the super sport cars dealer HRO were fairly volatile previously given the auto sales value coupled with the British pound’s volatility. Meanwhile, its 10.2%-owned Vietnamese NFO firm, Berjaya GTI, is still in the red, although it has operated since mid-2016 and is unlikely to be profitable in the near future given the infant NFO market there.
BToto was suppressed in the past five years due to declining ticket sales. However, its fortunes turned when it posted a remarkable YTD gain of 25% largely due to improving ticket sales. We also noticed other sin stocks such as Magnum and brewers Carlsberg Brewery Malaysia Bhd — with an “underperform” rating and TP of RM21.80 — and Heineken Malaysia Bhd (“maintain perform”; TP: RM21.90), posting strong YTD gains of 20% to 32% as we believe investors are seeking laggards with defensive qualities and these stocks offer attractive above-average yields.
Even with strong gains, BToto remains a laggard as it is the cheapest among these sin stocks, and with the highest dividend yield. It trades at 13 times price-earnings ratio (PER) — only half of brewers’ valuation, while BToto offers above 6% yield against the rest at over 3%. As such, BToto can be a sector catch-up play.
In view of the said ticket sales downtrend finally reversing and with better sales ahead on enforcement against the illegal market, we raised our terminal growth from 1% to 2% — the same as Magnum’s, while keeping our key assumptions unchanged, thus we upgraded our TP to RM2.95 from RM2.65 per discounted cash flow (DCF) share.
We believe our new TP is not excessive as the counter is still the cheapest sin stock with the highest dividend yield. Our TP also implies a prospective PER of 14.7 times, in line with its three- and five-year means. As such, we kept our “outperform” call, with downside risks including a decline in ticket sales and a higher-than-expected estimated prize payout ratio. — Kenanga Research, April 8