Investment Highlights

• Maintain HOLD on Berjaya Sports Toto Bhd (BST) with an unchanged fair value of RM2.60/share. BST is currently trading at FY18F PE of 11.5x and FY19F PE of 11.3x.

• BST's 1HFY18 results were within our expectations but below consensus estimates. The group declared a gross DPS of 4 sen in 2QFY18, which brings gross DPS to 8 sen in 1HFY18.

• We have forecast a gross DPS of 16 sen for FY18F (FY17: 14 sen), which implies a decent yield of 7.0%. BST's operating cash flows rose from RM64.2mil in 1HFY17 to RM145.9mil in 1HFY18.

• BST's net profit increased by 12.5% from RM120.9mil in 1HFY17 to RM136.0mil in 1HFY18 on the back of a lower prize payout. This boosted gaming profits, which helped compensate for weaker earnings from the motor dealership unit.

• The 4.3% YoY fall in the pre-tax profit of the motor dealership in 1HFY18 was due to weak sales. In its results announcement, BST said that motor sales dropped in 2QFY18 as a result of the softening demand in the United Kingdom auto market. HR Owens made up 42.4% of BST's turnover and 7.7% of operating profit in 1HFY18.

• In the gaming division, revenue inched up by 0.9% YoY in 1HFY18 in spite of fewer draws. There were 87 draws in 1HFY18 vs. 88 draws in 1HFY17.

• We estimate that gross ticket sales per draw rose by 2.1% YoY to RM17.5mil in 1HFY18. This was mainly driven by strong sales resulting from the jackpot prize in the 6/63 game, which hit RM69.6mil in September 2017.

• Also, we estimate the prize payout of the gaming division to be 66.5% in 1HFY18 against 67.5% in 1HFY17. The lower prize payout helped contribute to a 10.6% YoY increase in the pre-tax profit of the gaming division in 1HFY18.

• Comparing 2QFY18 against 1QFY18, BST's net profit dropped by 16.9% dragged by a higher prize payout and losses in HR Owen. HR Owen recorded a pre-tax loss of RM4mil in 2QFY18 vs. a pre-tax profit of RM15.5mil in 1QFY18. We estimate prize payout of the gaming division to be 66.6% in 2QFY18 against 63.6% in 1QFY18.

• Share of losses in associates swung from RM1.8mil in 1QFY18 to a positive RM0.4mil in 2QFY18. We think that the performance of the lottery operations in Vietnam improved QoQ in 2QFY18. 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.

Source: AmInvest Research - 19 Dec 2017