Results

• FY16 core PATAMI of RM297.55m came in above HLIB’s estimate but within consensus expectations, at 110.1% and 102.8% of our and consensus full year estimation.

Deviations

• Above our expectation due to lower prize payout.

Dividends

• Declared fourth interim dividend of 5.0 sen, FY16 dividend at 19 sen consists of 16.5 sen cash and share dividend of 1 for 140 existing shares, representing a yield of 6.6%.

Highlights

• Full year PATAMI contracted by 10% due to lower contribution from NFO operations in Malaysia attributable to GST effects implemented since April 2015, poor luck and competition from illegal betting operators.

• Strong 4Q bottomline came in at a surprise high (representing 33.9% of full year profit) which helped to mitigate an otherwise lackluster year, thanks to the low payout (estimated at 61% vs 65% yoy)

• PGMC reported lower top and bottomline caused by lower rental income and higher operating expenses. It is a relief that the license will only expire in Aug 2018 given the competitive lottery business environment in Philippines.

• Revenue from H.R. Owen continued to climb (+15% yoy) and made up 39% of FY16 revenue, partially helped by favourable forex effect. However, its bottomline contribution remained minimal, with a decline of 27.3% yoy, due to higher opex from additional outlets.

• 2016 served as a new normal for NFO as GST effect normalized and a more stable performance is foreseen onwards, provided no large swing in luck factor.

Risks

• Higher-than-expected prize payout ratio.

• Cannibalization from Magnum’s and PMP’s Jackpot Games.

• Hike in pool betting duty/gaming tax.

Forecasts

• Revise upward our FY17 & FY18 revenue forecast by 5.2% and 7.3%; bottomline by 5.1% and 5.2% respectively, after factoring higher revenue growth for H.R. Owen at 5% and revised our margin assumption.

Rating

• BUY

• We upgrade to a BUY in view of the recent retreat in share price and attractive yield play. Besides, possible margin expansion at H.R.Owen and additional income from Vietlott may provide further upside. However, we remain cautious on its longer term outlook with no excitement for a matured NFO market with shrinking margin on di fficult economic conditions and rampant illegal gaming activities.

• 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 upgrade to BUY with unchanged target price at RM3.10 after updating our DCF valuations parameters

Source: Hong Leong Investment Bank Research - 21 Jun 2016