Results

• 1HFY17 core PATAMI of RM64.74m (-2%) came in below expectations, accounting for only 44.7% and 41.5% of our and consensus full year estimates.

Deviations

• High-than-expected prize payout and higher opex.

Dividends

• Declared 2nd interim dividend of 4.0 sen at a payout ratio of 87% (2QFY16: 95%), bringing YTD dividend of 8.0 sen, translating an annualized yield of 5.2% at current price.

Highlights

• Yoy, core PATAMI was flat, as higher payout and opex from Sports Toto and lower income from PGMC were offset by improved performance by H.R. Owen and International Lottery & Totalizator systems (ILTS, a subsidiary in the US) coupled with lower effective tax rate at 32.8% (vs 36.5% last year).
• Qoq, bottom-line improved by 6.2% primarily due to lower effective tax rate and higher contribution from ILTS (arising from recognition of substantial project contract sales), which more than mitigated weaker contribution from all the other main segments.
• YTD, core profit was down by 2% with weaker results from gaming and others segments due to lower revenue, higher payout & opex as well as losses from investment holdings companies and subsidiary.
• Gaming operations remained weak with weak performance from both SportsToto (-8.8%) and PGMC (-9.9%), caused by weak sales while opex and prize payout were high.
• Despite the lacklustre overall results, revenue for HR Owen grew by 10.8% but the PBT margin remained low at 1.4% compared to 1.6% in 1HFY16. HR Owen would have recorded growth if not for the less favourable forex impact.

Risks

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

Forecasts

• We raised our prize payout and cost assumptions as well as lowering dividend payout ratio, resulting in lower bottom-line for FY17 (-8.4%) & FY18 (-2.3%). FY17 dividend projection is also revised lower to 18 sen (from 20 sen previously).

Rating

HOLD ↔

• No fresh catalyst in view of the saturated NFO business amidst challenging operating environment and rampant illegal operators as well as uncertainties in other business segments.

Valuation

• Target price revised lower to RM2.87 from RM 3.16 based on DCF valuations with higher WACC at 9.27% as we factored in a higher risk-free rate assumption and rolled forward to FY18.

Source: Hong Leong Investment Bank Research - 19 Dec 2016