Investment Highlights

• Maintain HOLD on Berjaya Sports Toto Bhd (BST) with a lower DCF-based fair value of RM2.35/share (vs. RM2.60/share previously) (WACC: 10%, terminal growth rate: 2.5%). BST is currently trading at FY18F PE of 11.5x and FY19F PE of 11.3x.

• We have reduced BST's FY19F net profit by 5.1% to account for weaker contribution from the gaming subsidiary in the Philippines. In early March 2018, BST announced that its subsidiary, Philippine Gaming Management Corporation, has lost the exclusive rights to supply online lottery systems in Luzon. Without the exclusivity, the Philippine Charity Sweepstake Office would be using other suppliers for its lottery system. The Philippines’ operations account for about 10% to 15% of BST's operating profit.

• BST's 9MFY18 results were within our expectations but below consensus estimates. The group declared a gross DPS of 4 sen in 3QFY18, which brings total gross DPS to 12 sen for 9MFY18. We have forecast a gross DPS of 16 sen for FY18F, which translates into a yield of 7.0%.

• BST's net profit improved by 15.7% YoY to RM195.3mil in 9MFY18 supported by a decline in the prize payout and absence of additional GST (goods and services tax) expense. Recall that BST had to recognise additional GST expense of RM15.6mil in 9MFY17 due to a different interpretation of formula adopted by the Customs Department. We estimate BST's prize payout at 66.2% in 9MFY18 vs. 67.2% in 9MFY17.

• Gross ticket sales per draw continued to inch down in 9MFY18 even after four years of decline from FY14 to FY17. We believe that this is due to weak consumer spending and competition from illegal operators in Malaysia.

• BST's gross ticket sales per draw edged down by an estimated 0.7% YoY to RM17.3mil in 9MFY18. There were 133 draws in 9MFY18 vs. 135 draws in 9MFY17.

• On a quarterly basis, gross ticket sales per draw slid by 2.6% in 3QFY18 in the absence of a huge jackpot prize. It is only when the jackpot prize for a lotto game snowballs would punters get excited and buy more tickets.

• As for the motor dealership unit in the UK, HR Owen recorded a higher pre-tax profit of RM21.5mil in 9MFY18 against RM10.4mil in 9MFY17. The improved performance was driven by higher sales of used cars.

Source: AmInvest Research - 19 Mar 2018