• Berjaya Sports Toto's (BST) Philippines subsidiary has lost its arbitration case against the Philippine Charity Sweepstake Office.

• The Philippine Gaming Management Corporation (PGMC) argued that it has exclusive rights to supply the online lottery system in the city of Luzon. However, the Arbitral Tribunal ruled that the province's 1995 Equipment Lease Agreement does not grant such exclusivity in its terms.

• In July 2017, the Philippine Charity Sweepstake Office scheduled a public bidding for other companies to supply lotto equipment. PGMC filed a temporary restraining order and injunction against the Sweepstake Office while the case was under arbitration.

• There are two implications. First, PGMC's revenue will drop as the Philippine Charity Sweepstake Office uses other suppliers for its lotto equipment. PGMC receives a percentage of the Sweepstake Office's sales as income.

• PGMC accounts for about 10% to 15% of BST's operating profit annually. Hence, a fall in PGMC's earnings would affect BST's net profit. We have not revised BST's net profit to account for this impact yet. We estimate that a 30% drop in PGMC's earnings would affect BST's net profit by 4% to 5%.

• Second, the Arbitral Tribunal has ordered PGMC to pay all of the Sweepstake Office's expenses in the arbitration of Php53.6mil (RM4.1mil) and reimburse US$200,000, which was an advance on the arbitration cost and expense. We believe that PGMC would not face any issue paying the expenses.

• Apart from supplying lottery equipment, Berjaya Philippines is also the franchise holder for Mazda cars and Papa John Pizzas in the country. In addition, Berjaya Philippines owns and operates the Berjaya Makati Hotel in the Philippines.

• In conclusion, we believe that this development is a setback for PGMC and BST. Maintain HOLD on BST with a fair value of RM2.60/share.

Source: AmInvest Research - 2 Mar 2018