Results

BToto reported 9MFY14 PATAMI of RM254.6m came in below expectations, accounting for only 66.1% and 63.9% of ours and streets’ full year estimates.

Deviations

Higher-than-expected operating expenses.

Higher-than-expected effective tax rate.

Dividends

Declared third interim dividend via a share dividend of approx. 30.68m treasury shares on the basis of 1 treasury share for every existing 43 ordinary share, equivalent to 9.5 sen/share. Entitlement date has been set on 16 Apr 2014 and to be credited by 28 Apr 2014.

Highlights

Yoy: Gaming revenue fell in absence of strong sales from its lotto game. Berjaya Philippines Inc. (BPI) suffered from lower lease rental income by Philippines Charity Sweepstake Office (PCSO). Lower revenue from both divisions was partially offset by the consolidation of HR Owen that was acquired by BPI late last year. Earnings were further impacted from higher expenses from its corporate actions (HR Owen and STM-Trust), which was partially offset by slightly lower prize payout ratio.

Qoq: Total revenues grew largely due to the revenue growth from BPI. Gaming revenue remained flattish despite the additional one draw game during the quarter. Earnings however fell 13.9% from higher expenses (for HR Owen and STM-Trust) and higher tax rate.

4D Jackpot’s market share status remained neck-to-neck among all three (BToto, Magnum and Da Ma Cai), in line with our expectations. The latest market shares by these three operators are 34.4%, 38.0% and 27.6% respectively.

The absence of high sales from Power 6/55 during the quarter contributed to the 15.7% drop in lotto sales. To note, Power 6/55’s jackpot of RM31.4m was hit back in 2QFY14, where its sales have fetched up close to RM1m (average sales for Power 6/55 usually ranged between RM200- 400m).

Risks

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

Forecasts

We tweaked our earnings lower to take into account higher effective tax rate as well as higher operating expenses. Hence, FY14-16 EPS is lowered by 6-12%.

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; (2) Prize payout dependable on luck factor; and (3) listing of business trust dilutive to earnings and attracts holding company discount.

Valuation

Post-earnings revision, TP is reduced to RM4.15 (from RM4.57) based on DCF valuations. However, we maintain BUY on the stock for its high dividend yield of 5.6% based on current price.

Source: Hong Leong Investment Bank Research- 18 Mar 2014