This article first appeared in The Edge Financial Daily on March 20, 2019
Berjaya Sports Toto Bhd
(March 19, RM2.31)
Reiterate sell with a lower target price (TP) of RM2.21: Berjaya Sports Toto Bhd’s (BToto) nine months of financial year 2019 (9MFY19) core earnings of RM208.1 million is below our expectations of 58.2% of full-year forecasts but within consensus estimates of 74.5%. The variance was largely due to a higher-than-expected prize payout and effective tax rate. For this quarter, the company declared a third interim dividend of 3.5 sen a share, bringing the year-to-date dividend to 11.5 sen — half a sen lower year-on-year (y-o-y).
For the third quarter (3Q) of FY19, its pre-tax profit declined 4.4% y-o-y to RM94.4 million, underpinned by a 3% decline in revenue due to two lesser draws and lower car sales by HR Owen; and a higher prize payout, contributing to a 15.5% decline in operating profit for the numbers forecast operation (NFO) division. The decline in NFO profit was partially offset by an increase in margins from sales of new car models.
For 9MFY19, its core profit rose 4.1% y-o-y to RM208.1 million despite a lower revenue of RM4.2 billion or -1.1% y-o-y. The car franchise division saw a higher operating profit of RM44.9 million or 43.3% y-o-y with increased sales of new models commanding higher margins and a lower operating cost from the closure of a loss-making sector. The NFO division, however, reversed its six months of FY19 earnings before interest and tax (Ebit) growth of 3% and registered a 9MFY19 Ebit contraction of 3.1% to RM325.3 million with the higher prize payout in 3QFY19.
We cut our FY19, FY20 and FY21 earnings projections by 16.8%, 20% and 12.7% after revising our prize payout assumptions of 61% to 62%, from 60% previously. We also adjusted our FY19 to FY21 effective rate assumptions to 33% from 30% previously. For FY19 dividend projection, we lowered it one sen to 15 sen a share.
While the US Federal Reserve is now being patient with rate hikes in the US, we can expect Bank Negara Malaysia’s monetary stance to be less hawkish this year. High dividend stocks such as BToto may appeal to investors in this low interest rate environment. However, Brexit’s lingering threat could have a profound impact on HR Owen, a leading sports car dealer in the UK. Also, the reduction in special draw to 10 times in 2019 is expected to reduce earnings potential by an estimated 3.3%.
As such, we reiterate our “sell” recommendation for BToto given the looming risks to FY20 earnings. Our dividend discount model valuation is lowered slightly to RM2.21 a share, from RM2.22 previously, after cutting our FY19 dividend projection to 15 sen. — TA Securities, March 19