This article first appeared in The Edge Financial Daily on April 15, 2020

Berjaya Sports Toto Bhd
(April 14, RM2.19)
Maintain buy with a lower target price (TP) of RM2.90: We are positive about Berjaya Sports Toto Bhd (BToto) continuing to benefit from the authorities’ stringent enforcement in curbing illegal numbers forecast operators’ (NFOs) activities. Later this year, we expect a further intensified clampdown on illegal NFOs, which could be another catalyst for the sector. We believe the stock’s attractive dividend yield of more than 6% will continue supporting its share price.

BToto’s operations have temporarily closed due to the 42-day movement control order (MCO) in response to the Covid-19 outbreak. There will be 19 draws lost, of 167 draws for financial year 2020 (FY20), during the MCO. We estimate BToto’s earnings to fall about 12% due to the temporary closure.

However, we foresee an increasingly challenging operating environment for its subsidiary HR Owen, a franchise motor vehicle dealership in the UK. Our concerns mainly stemmed from the ongoing Covid-19 pandemic leading to a temporary lockdown in the UK and issues concerning the UK’s exit  (Brexit) from the European Union. Nonetheless, we are highlighting HR Owen’s profit contribution to the group is relatively small. For FY19, HR Owen accounted for about 10% of the group’s earnings.

Currently, BToto offers an attractive sustainable yield of more than 6%. Investors could enjoy this while riding on these investment themes. Potential ongoing monetary easing by major global central banks and Bank Negara Malaysia could also promote a yield-seeking investing strategy, favouring companies such as BToto.

Our FY20, FY21 and FY22 earnings forecasts for BToto are trimmed 17%, 1% and 1%, mainly to account for a reduction of 19 draws in FY20 and a lower contribution from HR Owen. Our “buy” recommendation on BToto is maintained with a lower dividend discount model-based TP of RM2.90.

Besides a potentially prolonged Covid-19 pandemic that could lead to weaker consumer sentiments and an erosion of NFOs’ earnings, an increased gaming tax and/or betting duty by the government could be another key risk to our “buy” recommendation on BToto.

Our sensitivity analysis showed a 1% increase in gaming tax or betting duty could reduce BToto’s forward earnings by about 7%, assuming the group fully absorbs the tax increase. Nevertheless, we believe NFOs are likely to pass the tax increase to punters by revising prize payouts. Previously, gaming tax and pool betting duty for NFOs were raised to 8% in 1998 and 2010 respectively. — AllianceDBS Research, April 14