Btoto’s 1QFY19 core PATMI of RM81m (+17.2% YoY) was above expectations mainly driven by luck factor and higher contribution from H.R. Owen. The better results YoY and QoQ were mainly due to lower prize pay-out and operating expenses as well as higher car sales and margin. We lift our FY19/FY20 core PATMI by 4.1%/4.6%, respectively after factoring in higher margin with lower operating expenses although still expecting weaker quarters ahead. As a result, TP is raised to RM2.34 (from RM2.21) based on DCF valuation.

Above expectations. 1QFY19 revenue of RM1.5bn translated into core PATMI of RM80.9m, accounting for 31.8% and 29.1% of HLIB and consensus full year forecasts, respectively. The strong results were mainly attributable to lower-than expected prize pay-out for Sports Toto and higher-than-expected margin from H.R. Owen.

Dividend. Declared 1st interim dividend of 4.0 sen (1QFY18: 4.0 sen) per share going ex on 3 Oct 2018, translating to an annualized yield of 7.0% at current price.

QoQ. Revenue grew by 7.1% while core PATMI rose 47.0%, which are attributable to 1) lower prize pay-out and zerorisation of GST for Sports Toto operation; 2) higher car sales and margin of its car dealership operation in UK; and 3) better results from PGMC resulting from higher lease rental income earned as a result of higher sales.

YoY. Similarly, core PATMI improved by 17.2% despite revenue only rising by 2%, mainly due to lower prize pay-out and operating expenses for Sports Toto operations and improved profits from H.R. Owen thanks to higher car sales.

Sports Toto operation. Posted lower sales per draw overall (-3.1% YoY) due to the impact of World Cup season despite the two-month tax holiday. Notably, higher ticket sales were recorded for 4D Jackpot game (+28.3% YoY), mainly enticed by the high jackpot prizes but cannibalizing the sales for other games.

Outlook. Although 1QFY19 results prevailed strongly, we expect weaker subsequent quarters with the normalizations of luck factor and post-tax holiday effect. Besides, we expect lower performance of H.R. Owen (as the car dealership business is seasonally stronger in Q1) as well as lower contribution from Philippines Gaming Management Corporation (PGMC) moving forward.

Forecast. We lift our FY19/FY20 core PATMI forecasts by 4.1%/4.6%; respectively after factoring in higher margin for car dealership operation and lower operating cost for Sports Toto operation as well as minor booking adjustments following the release of annual report figures.

Maintain HOLD, TP is raised to RM2.34 (from RM2.21) based on DCF valuations with WACC of 8.1% and TG of 1.5%. We believe Btoto remains unexciting with the lack of fresh catalyst, challenging operating environment amid rampant illegal operators coupled with the losing income stream from Philippines.

Source: Hong Leong Investment Bank Research - 20 Sept 2018