This article first appeared in The Edge Financial Daily on August 5, 2019

Berjaya Sports Toto Bhd
(Aug 2, RM2.67)
Maintain hold with a target price of RM2.40: While the government’s campaign against illegal operator by closing their physical outlets has been effective in allowing the numbers forecast operators (NFO) industry’s revenue to grow again in the last two quarters, the benefits will be capped without an effective amendment to the Gaming Act which addresses the much larger illegal online operators.

While Sports Toto Malaysia’s (STM) fourth quarter of financial year 2019 (4QFY19) core net profit rose 18% year-on-year (y-o-y), we gauge that the growth of ticket sales per draw was decent (3% to 4% for the classic NFO games) despite the number of special draws being halved by the government for 2019.

We continue to foresee low-single-digit earnings for STM to closely track our projected 3% to 4% growth in sales per draw for FY19 to FY20, given that the smaller earnings impact from reduced special draw days.

Berjaya Sports Toto Bhd’s (BToto) new game variant 4D Zodiac has reportedly received encouraging response. The game which was introduced last month should modestly enhance BToto’s classic games revenue. However, we gauge that the popularity of this game would not be high, based on the reportedly lukewarm response for a similar “zodiac” game (3+3D Bonus) by rival operator Da Ma Cai.

Subsidiary Berjaya Philippines (BPI) will need to participate in a tender exercise when its concession expires in August 2019. Competition is keen as there is only one licence up for bid, and some of BPI’s competitors include some Chinese and South Korean companies.

Meanwhile, on a positive note, Philippine President Rodrigo Duterte has quickly allowed BPI’s lotto operations to resume a few days after suspending all of the Philippines Charity Sweepstake Office’s (PCSO) gaming activities after he ordered a corruption investigation against PCSO.

There is 10% to 15% downside risk to BToto’s earnings should BPI lose its concession but this in theory should not reduce BToto’s dividends which are fully dependent on its Malaysian operation’s cash flow.

BToto may need to write off most of the lottery business’ carrying value which is estimated to be equivalent to RM47.3 million. The management would consider expanding into other existing businesses such as hospitality, food and beverage as well as automobile segments.

Meanwhile, 10%-owned Berjaya Gia Thinh Investment’s operation is dawdling. Since venturing into the Vietnam market in 2016, the operating company is still in the red as revenue and the number of outlets trailed expectations. We believe that regulatory bureaucracy has been a major impediment.

In 4QFY19, UK-unit HR Owen’s revenue increased 16.8% y-o-y from RM663.5 million from RM567.9 million due to higher sales driven by new car models. However, pre-tax profit plunged 46.4% y-o-y due to higher operating and investment related expenses.

There is no change to our forecast of flattish FY20 earnings as BToto’s earnings growth is partly offset by lower BPI contribution. We also introduce our FY22 net profit forecast, which expects modest 3% y-o-y growth. Our forecast continues to assume that BPI retains its concession. — UOB Kay Hian, Aug 2