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This article first appeared in The Edge Financial Daily on September 21, 2018

Berjaya Sports Toto Bhd
(Sept 20, RM2.30)
Maintain neutral with an unchanged target price (TP) of RM2.62:
Berjaya Sports Toto Bhd (BToto) reported a 16.9% increase in its net profit for the first quarter of financial year 2019 (1QFY19) to RM86.9 million, mainly due to higher contribution from Malaysia’s number forecasting operations on lower prize payout ratio. The results accounted for 31% of our and consensus full-year estimates. However, we are retaining our earnings forecasts as we expect the prize payout ratio to fluctuate from quarter to quarter. BToto declared a first interim dividend of four sen per share, which represents about 62% of its 1QFY19 earnings (1QFY18: four sen per share).

 

BToto’s 1QFY19 revenue was up marginally but net profit rose 16.9% year-on-year (y-o-y) due to higher earnings contributions from Sports Toto as well as HR Owen plc. Sports Toto’s revenue was flattish but as a result of lower prize payout and operating expenses, pre-tax profit rose 14% y-o-y. Meanwhile, HR Owen, the motor dealership business, registered a 4.2% increase in revenue but pre-tax profit jumped 35.4% to RM20.9 million due to improved margin (3% versus 2.3% in 1QFY18) on higher new vehicle sales during the quarter. Nevertheless, HR Owen only contributed 15% of group’s profit. Gaming operations remain the largest contributor, accounting for 84% of total profit.

On a quarter-on-quarter (q-o-q) comparison, net profit was 147% lower mainly due to impairment in value for available-for-sale investments and goodwill for leasing of lottery equipment business in the Philippines in 4QFY18.

Given the structural issue of persistent competition from non-mainstream gaming operators, we believe earnings growth will remain subdued for BToto in the long run. Also, it is still unclear whether the new government would implement its proposal to reduce special draws by number forecast operators beginning 2019. Based on our estimates, BToto’s FY19 forecast earnings will be reduced by 0.7% for every one special draw reduction. In view of these uncertainties that could potentially affect its future prospects while dividend yield is still attractive at 7%, we maintain our “neutral” rating on BToto with an unchanged TP of RM2.62. — PublicInvest Research, Sept 20

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