BToto seen to face uncertainty over BP ops

This article first appeared in The Edge Financial Daily, on September 7, 2018.
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Berjaya Sports Toto Bhd
(Sept 6, RM2.27)
Downgrade to hold with a lower target price of RM2.26:
Berjaya Sports Toto’s (BToto) 88.3%-owned subsidiary, Berjaya Philippines (BP), which is listed on the Philippine Stock Exchange, acquired 6.5 million shares of Bursa Malaysia-listed 7-Eleven Malaysia Holdings Bhd from March 1 to Sept 3, 2018 in the open market, for RM9.61 million.

BP’s acquisition price is about RM1.48 per share, which is 5.7% higher than Wednesday’s closing price of RM1.40. Following this acquisition, BP owns 18 million 7-Eleven shares, representing a 1.59% stake.

Even though minority investors in general are opposed to forays into non-core businesses or related-company investments, BToto has managed to continue doing so via BP.

Recall that BP’s previous investment in 7-Eleven took place in July 2017 when it acquired 5.4 million shares for RM7.38 million.

Nevertheless, BToto’s dividends are not impacted, having never been dependent on BP’s cash flows. We understand that BToto has never repatriated BP’s retained earnings as that would have incurred repatriation taxes, but instead prefers to reinvest BP’s cash.

Meanwhile, BP’s court case with the authority on its exclusivity in supplying lottery systems to the Luzon territory is still ongoing.

Recall that in fourth quarter ended April 30, 2018 (4QFY18), BToto impaired RM11 million for goodwill related to the lottery equipment leasing business in the Philippines, which could be linked to the risk of its rights to maintain the business indefinitely.

Should BP fail to renew its licence, we estimate a 10% to 12% downside risk to BToto’s sustainable earnings in FY19-20. In addition, further impairment is possible should the court case be prolonged. We estimate goodwill from the Philippines’ lottery business at RM70 million.

We cut our financial year ending April 30 FY19 to FY21 earnings estimates by 9% to 13%, taking into consideration the 6% sales and services tax with effect from Sep 1, 2018.

Downgrade BST to “hold” with a lower discounted cash flow-based target price of RM2.26 (previous: RM2.78), following our earnings adjustment, and increase our discount to 10% (from 5%) due to the uncertainty over BP’s lottery operations and continuous investments in non-core assets. Our new target price implies 11.1 times FY19 price-to-earnings with 7.2% prospective yields. — UOB Kay Hian Securities, Sept 6