Results

• 1QFY18 core PATAMI of RM71.1m (+5.1%) came in within expectations, accounting for 25.7% and 24.8% of HLIB and consensus FY18 full year forecasts, respectively.

Deviations

• None.

Dividends

• Declared 1st interim dividend of 4.0 sen (1QFY17: 4.0 sen) at a payout ratio of 73%, translating to an annualized yield of 6.9% at current price, as expected.

Highlights

• QoQ: Revenue was down marginally by 0.4% while core PATAMI increased by 4.3% due to stronger performance from HR Owen and Sports Toto (low base effect). In 4QFY17, Sports Toto results were hit by higher prize payout and higher opex.

• YoY: Core PATAMI increased by 5.1% along with higher revenue (+2.5%) mainly due to stronger performance from HR Owen on higher vehicle sales. Lower results were reported for Sports Toto and PGMC due to lower revenue, impacted by lower number of draw and higher opex.

• The improvement in HR Owen operation is rather encouraging with expansion in PBT margin. Should the PBT margin continue to improve or stable at current level, it could potential lift the earnings for FY18.

• Sports Toto operation remains challenging with declining sales for its 4D, 5D and 6D games despite higher revenue recorded for Lotto games enticed by the high jackpot prize.

• The ongoing arbitration on Philippine Charity Sweepstakes Office’s (PCSO) intention to open public bidding for the supply and delivery of online lottery equipment remains a concern for Btoto. Note that PGMC’s current license is expiring in August 2018.

Risks

• Higher-than-expected prize payout ratio.

• Cannibalization from Magnum and PMP.

• Hike in pool betting duty/gaming tax.

Forecasts

• Unchanged.

Rating

HOLD ↔

• Despite the recent retracement in share price, it remains unexciting given the lack of fresh catalyst, challenging operating environment amid rampant illegal operators. There are also uncertainties in the ongoing disputes on the interpretation of GST and the trend of IRB's of going hard on retrospective tax claims.

Valuation

• Target price is maintained at RM2.50 based on DCF valuations with WACC of 9.3% and TG of 1.5%.

Source: Hong Leong Investment Bank Research - 2 Oct 2017