http://www.thestar.com.my/business/business-news/2016/06/25/btoto-slide-raises-questions/

Why are investors getting out of a stock with a good dividend yield?

AT an indicative projected dividend yield of 7%, Berjaya Sports Toto Bhd (BToto) should be on the radar screen of investors who are looking for yield plays in this environment of low interest rates.

But this does not look to be case, going by its recent share price movement.

The stock has been battered in recent days after having hit its year-to-date (YTD) high of RM3.38 in March.

Thereafter BToto has retraced by some 14.5% to its YTD low of RM2.97 in the past two weeks. It closed at RM2.94 on Friday.

But why is this the case, considering that BToto has historically known to churn out healthy cash flows, thereby enabling it to reward shareholders with decent dividends?

One possibility is that the company has been hit by a perception that its major shareholders are beginning to cash out of the stock.

This is premised on the fact that the company’s major shareholders , namely Berjaya Land Bhd (BLand) and Berjaya Corp Bhd (Bcorp), had begun trimming their stakes in the company recently.

These stake disposals through off market trades were also executed at discounts to market.

According to statistics compiled by UOB Kay Hian in a report published on Tuesday, there were a total of almost 52.4 million shares that have been sold by both BLand and BCorp since the end of February.

This selling, more so because they were done at discounts to the market, may have fuelled speculation that these stake sales at a discount to market prices could continue indefinitely.

However, UOB Kay Hian believes that the disposals were carried out due to funding requirements for the major shareholder’s overseas projects. One example cited is BLand’s Four Season Hotel project in Japan.

“It should not be misconstrued as Berjaya Group’s falling confidence in BToto’s business resilience.

“Collectively, Berjaya Group’s stake in BToto has already eased to 48.3%, suggesting limited room for further stake sales that would still allow the group to retain control over the company,” the UOB Kay Hian report says.

“While we understand the holding companies still have residual BToto shares to sell, BToto’s share price should gradually recover once the sale is completed,” it adds.

Indeed, BToto’s recent results indicate that the underlying business remains on strong footing.

BToto reported a 35.1% growth in the fourth quarter ended April 30th earnings to RM104.7mil while revenues also grew in tandem to RM1.48bil from RM1.46bil a year ago.

The fourth quarter’s bottomline grew strongly due to a lower prize payout by the company.

While the recent results surprised the market, the stock continued to stay muted at RM2.90 the day after these results were announced.

With the full year profits now at RM306.2mil for FY16, Btoto’s historical price earnings multiple has reduced to 11.5 times.

It is left to be seen if Btoto’s share price will continue to stay muted, considering its encouraging FY16’s results and its decent dividend yield.

UOB Kay Hian says BToto’s financial year 2016’s (FY16) net profit of RM306.2mil is 10% above its full-year forecasts while Maybank Investment Bank Research says BToto’s full year’s core net profit was at 102% of its full year estimates.

“Despite the relatively flat total revenue (toto revenue was down 2.8% yoy), bottom line was better than expected, largely driven by luck factor. Fourth quarter core earnings were the best since the third quarter of FY13 and we believe this was due to the lowest prize payout ratio in the past three years,” UOB Kay Hian says.

UOB Kay Hian notes that BToto’s sales have bottomed out but is expected to be stagnant in the near term due to weak consumer spending.

“The goods and services tax was implemented since Apr 15 and BToto’s ticket sales formed a new low in the first quarter of FY16, implying first half of FY17’s sales should modestly improve year-on-year from a low base,” it says.

While there may be risks from illegal gaming activities that have been acknowledged by BToto themselves, the company also says it is confident of being able to maintain its market share in the industry.

It is quite rare, on the surface, that generous dividend payers such as BToto will see strong growth in their earnings, more so if they operate in a mature industry with limited growth opportunities.

But if this happens, it could be an indication that the company could actually be faring better than expected, and the market should be ready to reprice the stock accordingly.