• Maintain HOLD on Berjaya Sports Toto Bhd (BST) with a lower DCF-based fair value of RM2.85/share vs. RM3.20/share previously.

• We have reduced BST's FY18F net profit by 11.8% to account for a higher prize payout of 66% vs. 64% originally and a weaker growth in ticket sales of 1% against 2% previously.

• We have forecast BST's gross cash DPS to be 15 sen for FY18F, which translates into a yield of 5.8%. BST has declared a final gross DPS of 3 sen for 4QFY17, which brings total gross DPS to 14 sen for FY17. This implies a yield of 5.4%.

• BST’s FY17 results were above our expectation but below consensus estimates. The better-than-expected results were underpinned by earnings from HR Owen in UK, which were 73.7% above our forecast. Nevertheless, we do not expect this to sustain as the motor dealership's earnings are expected to be affected by the depreciation of the GBP against the MYR.

• After a weak 3QFY17, which was affected by additional GST adjustment of RM15.6mil, BST's 4QFY17 net profit rebounded by 51.2% on the back of a turnaround in the associates, a lower effective tax rate and higher earnings from HR Owen. BST recorded an effective tax rate of 25.8% in 4QFY17 vs. 42.6% in 3QFY17 due to recognition of deferred tax assets. Also, recall that BST's 3QFY17 results were affected by an additional GST expense of RM15.6mil.

• BST's associates include a 20% stake in Berjaya Lottery Vietnam and 25.5% shareholding in Berjaya Auto Philippines.

• Operationally, gross ticket sales per draw improved by 1.8% QoQ in 4QFY17 while prize payout was relatively unchanged at about 66%. There were 44 draws in 4QFY17 against 47 draws in 3QFY17.

• Comparing FY17 against FY16, BST's net profit contracted by 21.8% to RM241.3mil. Apart from the additional GST expense of RM15.6mil, BST was affected by a forex loss of RM6.3mil and loss on dilution of shareholding in Bermaz Auto Philippines of RM8.6mil in FY17.

• BST's revenue improved by 3.1% to RM5.7bil in FY17 due to an 8% increase in the sales of HR Owen. HR Owen accounted for 41% of revenue and 6.3% of group EBIT (before unallocated corporate expenses) in FY17.

• Industry ticket sales are still weak. This is reflected in the fall in BST's ticket sales per draw since FY13. On a per draw basis, gross ticket sales slid by 1.2% in FY17 vs. an 1.8% decline in FY16. There were 179 draws in FY17, which were the same as FY16.

Source: AmInvest Research - 21 Jun 2017