- Maintain HOLD on Berjaya Sports Toto Bhd (BST) with a lower DCF-based fair value of RM4.20/share. We are not revising BST’s FY14F earnings forecast yet as HR Owen’s earnings are usually seasonally stronger in the 2H of the financial year. HR Owen is BST’s motor dealership in UK.

- Excluding HR Owen, BST’s 1QFY14 results were weak YoY due to tepid ticket sales and a high prize payout ratio. Also, there was a fall in the earnings of Berjaya Philippines due to lower sales reported by the Philippines Charity Sweepstakes Office.

- BST has declared a gross cash dividend of 5.5 sen/share for 1QFY15 (1QFY14: 4 sen). For the full year, we are expecting a gross DPS of 26.5 sen (FY14: 26.5 sen), which implies a yield of 7.1%.

- BST’s ticket sales were sluggish, dragged by weak consumer spending and competition from illegal operators.

- Lower number of draws also contributed to an estimated 9.2% YoY decline in ticket sales in 1QFY15. On a per draw basis, gross ticket sales shrank 4.9% from RM17.0mil in 1QFY14 to RM16.1mil in 1QFY15. There were 42 draws in 1QFY15 against 44 draws in 1QFY14.

- Operating profit of the NFO division contracted by 26.4% YoY in 1QFY15 due to an increase in prize payout ratio. We estimate BST’s prize payout at 65.3% in 1QFY15 versus 62.9% in 1QFY14.

- Looking ahead, Berjaya Philippines’ gaming concession is expected to expire in August 2015. Berjaya Philippines accounts for about 13% of BST’s operating profit currently. Most of Berjaya Philippines’s earnings are from the gaming concession.

- We reckon that the fall in Berjaya Philippines’ contribution would be partly cushioned by BST’s lottery contract in Vietnam.

- However as BST’s effective stake of 10.2% in the lottery contract would not be enough to offset the loss of earnings from the gaming concession, we believe that BST and its subsidiary, Berjaya Philippines would continue to look for new investment opportunities.

- Recall that in May 2014, BST and Berjaya Corporation’s unit won a contract to install and operate a computerised lottery system in Vietnam. We believe that the joint venture would likely enjoy a percentage of ticket sales as payment for the installation of the systems.

Source: AmeSecurities