Results 

• BToto  reported  1QFY15  PATAMI  of  RM78.34m  came  in below  expectations,  accounting  for  only  18.3%  and  20%  of ours and consensus’ full year forecasts, respectively.  

Deviations 

• Higher-than-expected  payout  ratio,  operating  expenses  and D&A costs.

Dividends 

• Declared  f irst   interim  dividend  of  5.5  sen/share  (1QFY13:  4 sen/share).  This  represents a total dividend payout and yield of 94.7% and  1.8% respectively.

Highlights 

Yoy:  Growth  in  revenue  was  largely  driven  by  the  additional boost  from  the  consolidation  of  HR  Owen  acquired  back  on 3QFY14.  Excluding  HR  Owen’s  contribution,  BToto  would have  recorded  a  decline  in  revenue  of  9.6%  largely from the poor  performance  of  its  lotto  games  (Figure  2)  as  well  as lower  number  of draw  days.

Despite  the  jump  in  revenue,  earnings  were  impacted  (-20.7%)  on  the back of higher estimated prize payout ratio of 63.1%  vs.  60.7%  in  1QFY14.  Apart  from  that,  higher operating  costs also caused the group’s  earnings  to decline.

Qoq:  Revenue  suffered  8.5%  qoq  decline  from  flattish revenue  of  HR  Owen  (+0.2%)  and  lower  sales  of  BToto’s lottery  operations  (-13.3%)  due  to  lower  draw  days  as  well as  seasonally  higher  sales  in  4QFY14  due  to  CNY  festive (Jan  2014).

Earnings  however,  recorded  growth  of  13%  thanks  to  lower prize  payout  ratio  (Figure  2),  as  well  as  lower  operating expenses.

To  date,  Magnum  remained  as  the  market  leader  with highest  market  share  of  44.5%,  followed by BToto at 35.7% and Da Ma Cai at 19.8%.

Risks 

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

Forecasts 

• FY15-17  EPS  slashed  by  15-23%  after  taking  into  account the higher  prize payout, operating  expenses and D&A costs.

Rating  HOLD 

• 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.

Valuation 

• Post-earnings  revision,  TP  is  reduced  to  RM3.59  from RM4.15.
• We  also  downgraded  the  stock  to  HOLD  from  BUY  as  we do  not  foresee  any  exciting  catalyst  going  forward  apart  for its high dividend  yield of 5.7% based  on current share price.

Source: Hong Leong Investment Bank Research - 22 Sep 2014