Investment Highlights

• Maintain HOLD on Berjaya Sports Toto Bhd (BST) with a lower fair value of RM2.60/share (vs. RM2.85/share previously). We have reduced our assumption of BST's terminal growth rate in our five-year DCF valuation from 2.7% to 2.0% due to the poor outlook for the NFO industry. BST is currently trading at FY18F PE of 11.7x and FY19F PE of 11.5x.

• Although BST's annualised 1QFY18 results were above our expectations, we are keeping our earnings forecast as we expect the group's prize payout to normalise in the following quarters. Apart from a low prize payout, BST's 1QFY18 net profit was boosted by a 124.6% YoY jump in the pre-tax profit of the motor dealership unit in the UK and a forex gain of RM3.1mil.

• BST declared a gross DPS of 4 sen in 1QFY18, which was the same as 1QFY17. We have assumed a gross DPS of 15 sen for FY18F, which translates into a net payout of 76% (FY17: 78%). BST's operating cash flows improved from RM42.7mil in 1QFY17 to RM75.4mil in 1QFY18.

• BST's net profit improved by 26.5% YoY to RM74.3mil in 1QFY18 as revenue rose by 2.5%. Recall that BST's 1QFY17 results were affected by losses of RM16.1mil in the "others" division (mainly property and hotel operations) and a high effective tax rate of 36.3%.

• Pre-tax profit of the motor dealership in the UK grew by 124.6% from RM6.9mil in 1QFY17 to RM15.5mil in 1QFY18 due to an increase in the sales of new and used vehicles. HR Owens accounted for 15.3% of BST's operating profit in 1QFY18.

• Share of profits in associates swung from a positive RM2.8mil in 1QFY17 to a negative RM1.8mil in 1QFY18. We believe that this was mainly attributed to the lottery operations in Vietnam. The first lottery game, Mega 6/45 was launched in Ho Chi Minh City in July 2016. BST has a 20% shareholding in the Vietnam lottery operations.

• Lottery revenue in Malaysia slid by 2.3% YoY in 1QFY18 as there were fewer draws. There were 42 draws in 1QFY18 vs. 43 draws in 1QFY17. On a per draw basis, BST's ticket sales were flat YoY in 1QFY18.

• Operating profit of the lottery unit rose by 2.3% YoY in 1QFY18 due to a lower prize payout. We estimate BST's prize payout at 63.6% in 1QFY18 compared with more than 65.0% in 1QFY17.

Source: AmInvest Research - 21 Sept 2017