Berjaya Sports Toto (BST) reported a net loss of RM17.7m in 1QFY22 as its gaming operations in Malaysia were affected by the nationwide lockdown where all sales outlets were temporarily closed. The results were below our and market expectations. We slash our FY22-24F earnings forecasts by 5%-36% as we factor in the impact of a slow recovery in ticket sales following a gradual reopening of the economy in September and the introduction of Cukai Makmur in 2022. As a result, our DCF-based TP is revised down from RM2.40 to RM2.15. We remain wary of the uncertainty surrounding the recent banning of number forecasting operations in Kedah. Coupled with a weaker earnings outlook for FY22F, we downgrade BST to Neutral. A first interim dividend of 1.0sen per share was declared (1QFY21: 4.0sen per share).

• 1QFY22 revenue fell 40.7% YoY, mainly due to an 89% drop in Malaysian gaming revenue as there were only 8 draws conducted in the quarter as compared to 42 draws in the previous year’s corresponding quarter. This was the result of a nationwide lockdown imposed by the government, which led to a temporary closure of all sales outlets from 1 June to 13 September 2021. However, the adverse impact was partly offset by better performance posted by the motor dealership segment where sales grew by 6% YoY. The used car sub-segment was more robust as new car sales were affected by global chip shortage.

• Incurring net loss of RM17.7m. Owing to the loss of revenue and fixed operating expenses incurred during the period, BST posted a net loss in 1QFY22, compared to a net profit of RM67.9m in 1QFY21. Meanwhile, motor dealership margin improved from 3.3% to 3.9%, mainly attributed to the used car market.

• Outlook. It was recently reported that all shops selling number forecast lottery draws in Kedah will no longer have their business licenses renewed by the local councils. Kedah’s Mentri Besar said the move aims “to tackle the ills resulting from gambling”. Although we do not expect BST to be significantly affected (as <3% of its total outlets are located in Kedah), we view this negatively as it may further encourage the proliferation of illegal activities, resulting in the loss of tax revenue to the government. Meanwhile, despite the reopening of the economy, the recovery in ticket sales appears to be slower than-expected and we believe this could be due to loss of market share to illegal operators as well as weaker consumer sentiment.

Source: PublicInvest Research - 19 Nov 2021