FY18 core net profit was largely in line with our expectation after adjusting for impairments for goodwill relating to the Philippines operations and AFS investments. BST’s ticket sales per draw was up 1.5% yoy in 4QFY18 on the seasonal CNY impact but this was offset by a higher prize payout. Malaysia operations could benefit from stronger consumer sentiment but share price is vulnerable to the Philippines operations’ licensing renewal concerns. Maintain BUY with a new target price of RM2.78.

RESULTS

• Largely in line. Berjaya Sports Toto (BST) reported 4QFY18 revenue of RM1,441m (-2.5% yoy, +2.6% qoq) and headline net profit of RM35m. 4QFY18 core net profit came in at RM63m (-13.6% yoy, +5.7% qoq), after adjusting for RM28m in impairments (RM11m for goodwill relating to leasing of lottery equipment business in the Philippines and RM17m for available-for-sale (AFS) investments). FY18 core net profit was RM255m (-13.6% yoy) which is deemed largely in line, representing 95% of our full-year forecast, with the slight shortfall coming from slightly lower-than-expected ticket sales and a higher-than-expected tax rate.
• RM28m impairment in 4QFY18. BST’s impairment relating to goodwill for the Philippines’ lottery equipment segment could be linked to the risk of its rights to maintain the business indefinitely. BST’s 88%-owned subsidiary, Berjaya Philippines (BP) is in the midst of legal proceedings with the Philippine Charity Sweepstakes Office (PCSO) for its exclusivity in supplying lottery systems for the Luzon territory. BP’s licence remains valid through to 21 Aug 18. Further impairment is possible should the court case be prolonged. We estimate that goodwill from the Philippines’ lottery business is at about RM70m, post the latest impairment. Meanwhile, the AFS impairment is relevant to both quoted and unquoted investments.
• STM’s ticket sales improved marginally on CNY effect… Sports Toto Malaysia’s (STM) revenue and ticket sales per draw both increased 1.5% yoy in 3QFY18. The marginally stronger ticket sales were due to the Chinese New Year (CNY) festive period which fell in February (2017’s CNY fell in January). We estimate the revenue mix of jackpot games and classic games remained largely unchanged yoy in 4QFY18.
• …but PBT dropped on higher prize payout. Despite the stronger revenue, PBT dropped 4.5% yoy in 4QFY18 due to a higher prize payout. We estimate 4QFY18’s prize payout to be at around 64%, 0.7 ppt higher than 4QFY17’s.
• Philippines toto business saw a drop. For Philippines toto operations, lease rental income was 7.4% lower yoy in 4QFY18, due to weaker ticket sales, in local currency terms. Exacerbated by the unfavourable forex effect, the business registered a yoy drop of 21.5% and 12.6% in revenue and PBT in 4QFY18.
• Volatile motor division improved significantly. In 4QFY18, H.R. Owen recorded a drop in revenue of 11.3% due to a drop in sales volume of new cars but this was offset by an improved margin from the sale of used cars, which in turn resulted in PBT increasing to RM13.0m from RM5.5m in 4QFY17.
• 4 sen dividend. BST declared a fourth interim DPS of 4 sen (4QFY17: 3 sen DPS), bringing FY18 DPS to 16 sen (FY17: 14 sen). FY18’s payout is at 94% of reported net profit but 84% of core net profit, largely in line with our expectation of a 80% payout.

STOCK IMPACT

• Marginal uptick in FY18 ticket sales per draw. STM achieved revenue of RM3.12b for FY18, relatively flat yoy, despite seeing a lower number of draws in the year. We estimate BST’s ticket sales per draw for FY18 was up marginally by 1%.
• Sector to benefit from strong consumer sentiment and higher disposable income… With the reduction of the GST rate to 0% and the reintroduction of petrol subsidy to address the higher cost of living, the gaming sector is expected to benefit from a recovery in consumer sentiment (particularly in June-August period where purchases will not be subject to both GST and SST) and higher disposable income over the long run.
• …but there could be a short-term impact from 2018 FIFA World Cup. We believe there could be mild negative revenue impact from the 2018 FIFA World Cup, which started on 14 June. Quarterly ticket sales per draw fell 3.0-3.5% yoy during the 2014 FIFA World Cup.
• Berjaya Philippines’ licensing renewal court case still in limbo. To recap, BP is in the midst of legal proceedings with PCSO. The Arbitral Tribunal had ruled that BP had no exclusive right to supply lottery systems for the Luzon territory and BP is appealing for a reversal in the arbitral tribunal’s decision. BP’s licence remains valid through to 21 Aug 18. Should BP fail to renew its licence, we estimate 10-12% downside risk to BST’s earnings in FY19-20.

EARNINGS REVISION/RISK

We reduced our FY19-20 net profit forecasts by 8% each as we cut our assumption on draws by two for FY19-20 respectively (in-line with FY18’s number of draws), fine-tune our effective tax rate assumption and factor in house-keeping adjustments. We also introduced our FY21 numbers.

VALUATION/RECOMMENDATION

Maintain BUY with a lower target price of RM2.78 (previous: RM2.86), following our earnings revision and incorporation of FY21 numbers to our DCF valuation. Our target implies 12.4x PE. Underpinned by A 7% yield, BST still offers more than a 10% total return, despite the recent run up. Note that BST’s yield will not be impacted should BP fail to renew its licence as we understand that BST’s dividend payment has never been dependent on BP's cash flows.

Source: UOB Kay Hian Research - 19 Jun 2018