Investment Highlights

• Maintain SELL on Berjaya Sports Toto (BST) with an unchanged DCF-based fair value of RM2.42/share (WACC: 10%, terminal growth rate: 3%). Our fair value implies an FY19F PE of 12.2x. In the past year, BST’s PE ranged from a low of 11.4x to a high of 13.6x. Average PE was 12.5x.

• We have raised BST’s FY19F net profit by 3.6% to account mainly for contribution from the Philippine operation. We have also reduced our assumption for FY19F gross ticket sales per draw from 3% to 2%. We had excluded contribution from the Philippines previously due to the potential loss of exclusive rights to supply lottery equipment in Luzon.

• We understand that BST’s Philippine lottery operations would remain intact for the next two years. This is because it would take about eight months for the Philippine authorities to carry out a public bidding process for lottery equipment suppliers. In addition, as long as BST does not receive a court hearing date for its appeal, the injunction against a public bidding process for lottery equipment in Luzon stays. BST has not received a court hearing date for its appeal yet. BST’s lottery concession is expected to expire in August 2018.

• The Philippine lottery concession accounts for about 12% to 13% or RM45mil to RM50mil of BST’s pre-tax profit. BST receives a percentage of the sales from the gaming terminals in Luzon. BST has been operating in the Philippines since 1993.

• Operationally, we have assumed that BST’s gross ticket sales per draw in Malaysia would improve by 2.0% in FY19F vs. 3.0% previously. We have become conservative in our assumption as industry ticket sales may be affected by the general election in May and competition from the illegal operators. We understand that the illegal market is 1.0x to 1.5x larger than the legal market. The legal market’s ticket sales were about RM7.6bil in 2017.

• We understand that so far, BST’s ticket sales in Malaysia have not been affected by the FIFA World Cup. Instead, ticket sales have been positive due to the 4D Jackpot game, which saw its first prize snowballing to RM26.8mil in late June. However, we believe that this is temporary as after a punter has won the jackpot prize, BST’s ticket sales would normalise to its low single-digit growth again.

• BST’s net gearing is high at 100.8%. The group’s RM1,156.7mil borrowings consist mainly of the RM800mil medium-term notes, which were issued in June 2017 to refinance the RM663mil medium-term notes. In spite of the high net gearing, we draw comfort from the interest coverage, which is comfortable at 8x. Also, BST’s free cash flows are consistently positive.

Source: AmInvest Research - 3 Jul 2018