Results

• 1QFY17 core PATAMI of RM64.74m came in slightly below expectations, accounting for 21% and 20% of our and consensus full year estimation.

Deviations

• Slightly below expectation due to higher interest expenses, and operating losses under “Others” segments from investment holding companies and US subsidiary.

Dividends

• Declared 1st interim dividend of 4.0 sen, representing an annualized yield of 4.8% at current price.

Highlights

• Yoy, core PATAMI contracted by 4.3% due to higher operating expenses incurred by H.R. Owen and forex exchange effect recognized by a foreign subsidiary, but mitigated by better contribution from NFO operations in Malaysia due to higher sales and lower payout.

• Qoq, core profit was lowered by 37.6% primarily due to NFO operations given seasonally higher sales and higher number of draws (43 vs 45) during last quarter, cushioned by better performance from PGMC and H.R. Owen.

• Revenue from H.R. Owen continued to climb (+17.5% yoy) and has now made up 43.6% of 1QFY17 revenue, boosted by new models available and additional outlets. Meanwhile slower performance was registered for PGMC due to lower lease rental income earned, offset by favorable forex effect.

• Note that the revenue from toto betting is now presented net of gaming tax and GST on gaming supply hence the revenue from last year was restated.

• Encouraging 3.6% growth was recorded in toto betting sales driven by higher jackpot prize given a lackluster sales last year post-GST implementation. However, management remains cautious on NFO business in view of consumer sentiment and illegal gaming activities as well as the uncertainties of Brexit on its motor dealership business.

Risks

• Higher-than-expected prize payout ratio.

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

• Hike in pool betting duty/gaming tax.

Forecasts

• We incorporate latest forecast assumption post annual report review and adjust lower our FY17 & FY18 by 3.2% and 3.21% respectively.

Rating

HOLD

• In view of the saturated NFO business in a challenging operating environment and rampant illegal gaming activities as well as uncertainty in H.R. Owen.

• 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

Maintain HOLD with target price increases to RM3.16 from RM3.10 based on DCF valuation after revising our forecast inputs and risk-free rate assumption to 3.5% from 4%.

Source: Hong Leong Investment Bank Research - 20 Sep 2016