Investment Highlights

• We are downgrading Berjaya Sports Toto (BST) from HOLD to SELL with an unchanged DCF-based fair value of RM2.42/share. We believe that BST’s valuations are uncompelling after the 19.7% run-up in its share price since 9 May 2018. BST is currently trading at an FY19F PE of 13.2x vs. its five-year average PE of 14.0x.

• BST has declared a gross DPS of 4 sen for 4QFY18, which brings total gross DPS to 16 sen for the full year. We have forecast a similar gross DPS of 16 sen for FY19F, which translates into a decent yield of 6.3%.

• BST’s FY18 results were below our expectations and consensus estimates due to impairments of RM28.5mil. Excluding the impairments, BST’s results would have been within our forecast and consensus estimates.

• BST recorded an impairment on goodwill of RM11mil in respect of its lottery equipment business in the Philippines. The group also recorded an impairment of RM17.5mil pertaining to available-for-sale quoted investments. We believe that the goodwill impairment related to the potential loss of the exclusive rights to supply lottery equipment in Luzon. BST’s Philippine unit is currently appealing the case in court.

• We estimate that the Philippines operations account for 10% to 15% of BST’s operating profit. We have already accounted for the loss of the business in BST’s FY19F net profit.

• We believe that part of the impairment on quoted investments was in respect of shares in Berjaya Assets. BST acquired seven million shares in Berjaya Assets in November 2016 at RM0.97/share or RM0.485/share (exshare split). Berjaya Assets’ share price is RM0.39/share currently. Apart from Berjaya Assets, BST also owns shares in Berjaya Food and 7-Eleven Holdings. However, we believe that BST’s investments in Berjaya Food and 7- Eleven are in-the-money.

• The lottery unit recorded positive growth in ticket sales per draw in FY18 after four years of decline. Gross ticket sales per draw inched up by 1.5% to RM17.6mil in FY18. There were 177 draws in FY18 compared with 179 in FY17. We have assumed that gross ticket sales per draw would increase by 3% in FY19F as consumer sentiment improves following the removal of the goods and services tax.

• Pre-tax profit of the motor dealership in the UK improved from RM16.0mil in FY17 to RM34.5mil in FY18. This was underpinned by an improved profit margin from used car sales. The unit accounted for 9% of BST’s pre-tax profit in FY18.

Source: AmInvest Research - 19 Jun 2018