Highlights

We relooked into BToto’s revised listing of STM-Trust in Singapore and we arrived at an indicative price of 48.4 cents/unit based on management’s yield expectation of 8% and 100% payout assumption (dividend/unit of 3.87 cents).

Stage 1: Post-listing of STM-Trust in Singapore ONLY - With the revised proposal, BToto will have an effective stake of 87.6% (or 86.5% in the event of full exercise of the overallotment option), and at FV of 48.4 cents, BToto is valued at RM4.47/share (upside of 10% from current price).

Stage 2: Post-listing of STM-Trust in Singapore & Malaysia – BToto will own only 29.4% (or 28.4% in the event of full exercise of the over-allotment option) after transferring 2.81bn units of STM-Trust to shareholders (21 units for every 10 shares of BToto). BToto’s FV would be adjusted to RM1.74/share (or RM1.57 with 10% holding company discount).

Given STM’s stable business and consistent cash flow, STM-Trust’ yield could align itself with other business trusts (BTs) listed in Singapore. Figure 5 shows that BTs in Singapore are trading at FY14 average yield of 7%.

Assuming STM-Trust yields 7% post-listing, share price would appreciate to 55.3 cents, resulting in a net gain of 6.9 cents. This translates to approximately RM0.37 for BToto shareholders.

Apart from that, shareholders would enjoy another RM0.29- 0.32/share (post-stage 2) should they purchase BToto shares at current price as the ex-all price ranges between RM1.25-1.28 (Figure 4), while the indicative fair value for BToto (after a 10% holding company discount) is RM1.57 (Figure 3). Hence, shareholders would have gained a total of RM0.66-0.69/share with assumptions that STM-Trust is listed at 8% yield and hovers around 7% thereafter.

As such, this further strengthens our view that the combination of revised proposal and recent share price weakness is an opportunity, given that shareholders would 1) have a direct interest in the operating company; 2) yield of 7%; 3) enjoy potential appreciation of RM0.66-0.69/share; and 4) while some shareholders may not have the mandate to hold shares in Singapore, these investors would have sold down their exposure which contributed to the recent price weakness.

Risks

• Higher-than-expected prize payout ratio.
• Cannibalization from Magnum’s and PMP’s 4D Jackpot.
• Hike in pool betting duty/gaming tax.

Forecasts

Unchanged.

Rating

BUY

Positives – (1) 4D Jackpot shows signs of stabilization vs. decline in sales previously (2) Monopoly of lotto games; (3) Highest-yielding stock in the gaming sector.

Negatives – (1) Highly regulated industry; and (2) Prize payout dependable on luck factor.

Valuation

Maintain BUY with unchanged TP of RM4.67 based on SOP valuations.

Source: Hong Leong Investment Bank Research- 14 Nov 2013