Results

• BToto reported 9MFY16 PATAMI of RM194.05m, came in below HLIB’s and consensus’s expectations, at 69.06% and 61.42% of ours and consensus’s full year estimation.

Deviations

• Below expectation due to higher payout and lower contribution from H.R. Owen.

Dividends

• Declared third interim dividend of 4.0 sen/share (92.4% payout), YTD dividend at 11.5 sen and 1 share dividend of every 140 shares.

Highlights

• Yoy, revenue contracted by 0.4% due to lower contribution from NFO operations in Malaysia and adjustment of Toto betting revenue to net GST on gaming supply (previously classified under cost of sales).

• Pre-tax profit was down again by 48% yoy (9M Core PATAMI: -25.17%) due to GST absorption, luck factor and loss making from its car dealership business. The decline in pre-tax profit would have been milder at 41.0% excluding the one-off stamp duty refund of RM18.0m in the previous year’s corresponding quarter.

• On NFO business, while topline remained stable, margins have been eroded by persistent higher payout which remained a concern, on top of rampant illegal NFO operators.

• H.R. Owen reversed its performance, slumping into loss for the 1st time since acquisition back in 2013, due to low car sales volume and lower supply of new model cars. Financial performance could have been worse i f not for the favourable foreign exchange effect.

• Apart from the recent license awarded for operation of nationwide computerized lottery in Vietnam (only 10.2% indirect stake at associate level), we see no excitement in the near term for a matured NFO market in a challenging economic environment with shrinking margin.

Risks

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

Forecasts

• Given that revenue is now reported net of GST, we tweak our model to reflect such change, revise upwards revenue from H.R Owen and adjust for higher payout assumption to reflect its consistent high payout ratio. As a result, our FY16 revenue forecast is raised by 1.2% but PATAMI forecast is lowered by 4%.

Rating

HOLD

• Posi tives – (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 maintain HOLD call with unchanged target price at RM3.10 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 21 Mar 2016