Results

• BToto reported 1HFY16 PATAMI of RM136.77m, came in below expectations, accounting for 39.31% of HLIB’s full year earnings estimation and 40.7% of consensus estimation.

Deviations

• Below expectation due to higher payout.

Dividends

• Declared second interim dividend of 5.0 sen/share, YTD 10 sen short of our full year forecast of 25.8 sen. However, total dividend payout ratio still generous at around 93.5%.

Highlights

• Overall, revenue increased by 15.06% yoy and 7.76% mom largely driven by higher 4D and 4D Jackpot sales and additional outlet from H.R. Owen as well as favourable exchange rate. Sales per draw of 4D Jackpot and 4D were RM2.43m (+23.3%) and RM17.61m (+6.1%), respectively.

• Despite higher revenue, lower profits are recorded due to GST impact, luck factor and lower rental income from Philippine’s business coupled with higher effective tax rate at 36.5% (vs. 29.7% 2QFY15 and 31.3% 1QFY16).

• On NFO’s business, while topline remain encouraging despite negative consumer sentiment, the margins have been eroded by higher payout and absorption of GST.

• We opined that the high 4D Jackpot sales may not sustain as it is highly dependent on the jackpot prize and illegal operator remains a threat.

• Compared to previous quarter, both top and bottom line for motor dealership segment were lower (but partly mitigated by favorable exchange rate) as better performance traditionally prevails in the 1H of calendar year.

• With high competition and challenging economic environment on NFO front, we believe that there is no catalyst in the short term with shrinking margin, unless margin expansion from motor dealership business can be achieved.

Risks

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

Forecasts

• By factoring in higher payout assumption, we lowered our earnings forecasts by 19.2% and 18.1% for FY16 and FY17, respectively.

Rating

HOLD

Positives

• (1) Monopoly of lotto games; and (2) Highestyielding stock in the gaming sector.

Negatives

• (1) Highly regulated industry; (2) Luck factor; (3) Higher cost environment; and (4) Illegal NFO

Valuation

• We revised our target price lower from RM3.21 to RM3.10 based on DCF valuations as we factored in the lowered earnings forecasts despite rolled over to FY17. Maintain HOLD rating.

Source: Hong Leong Investment Bank Research - 21 Dec 2015