News

• PGMC, a subsidiary of Btoto which supplies and maintains computerized online lottery system to Philippine Charity Sweepstakes Office ("PCSO") in Philippines has on 23 February 2018, received an unfavourable decision by the Arbitral Tribunal on the dispute of exclusive contractual right to supply the online lottery system for Luzon.

• PGMC has also being ordered to pay all of PCSO's costs and expenses in the arbitration, which amount to Php53,592,202.09 (~RM4.4m), and to reimburse PCSO the paid advance costs of US$200,000.00 (~RM785k).

• PGMC will appeal all aspects of the Award.

Highlights

• To recap, back in July 2017, PGMC applied for a temporary restraining order and preliminary injunction against PCSO to prevent the latter from continuing the bidding process and awarding the contract for the new centralized technology systems for lottery games in Luzon, Visayas and Mindanao.

• PGMC had early brought their cases against PSCO to an arbitration in 2014 on its exclusive rights to supply the online lottery system in Luzon after PSCO allowed its competitor, Pacific Online Systems Corp to operate in the same region.

• We are negative as this news raise the risk of Btoto losing the lottery equipment leasing income and affect Btoto negatively should they fail in the bid to continue as the service provider in an open bidding, on top of the arbitration cost stated above.

• Note that PGMC’s current license is expiring in August 2018 and even they succeed in securing the contract, we reckon that the margin would also be affected since upgraded technology and system are required under the new terms.

• The earnings contribution of PGMC to Btoto on its lottery leasing operation is estimated at circa 16% -20%. Based on our estimation, the segment contributed about RM48m and RM54m to Btoto earnings in FY17 and FY16, respectively.

Risks

• Higher-than-expected prize payout ratio.

• Cannibalization from Magnum and PMP.

• Hike in pool betting duty/gaming tax.

Forecasts

• We lower our FY19/FY20 earnings by 12.0%/17.6%, respectively after excluding the contribution from the lottery leasing operation post Aug 18.

Rating

HOLD ↔

• Btoto remains unexciting given the lack of fresh catalyst, challenging operating environment amid rampant illegal operators coupled with the risk of losing income stream from Philippines. An expected dividend of circa. 6% p.a. is the positive note, barring any huge swing in the luck factor.

Valuation

• Target price is lowered to RM2.21 after imputing the lower forecast as we roll forward our valuation to FY19, based on DCF valuations with WACC of 9.3% and TG of 1.5%.

Source: Hong Leong Investment Bank Research - 2 Mar 2018