Btoto's gaming unit in Philippine, PGMC has secured an extension for its equipment lease agreement along with a cash bond agreement for another year effective from 23 Aug 2018. We are positive on the contract extension (despite at a lower rate) as we had previously excluded the potential income from PGMC after the expiry of contract in Aug 2018. Meanwhile, the appeal process on the dispute with PCSO is still ongoing following the unfavourable decision back in Feb 2018. We lift our FY19/20/21 core PATMI forecasts by 4.2%/3.3%/0.3%; respectively after factoring in the upside from the contract extension and raise our DCF-derived TP to RM2.36 (from RM2.34).

NEWSBREAK

Btoto's 88.26%-owned subsidiary, Berjaya Philippines Inc. (BPI) on 28 Sept 2018, announced that its wholly-owned subsidiary, Berjaya Philippines’ Philippine Gaming Management Corporation (PGMC) has secured an extension for its equipment lease agreement along with a cash bond agreement with The Philippine Charity Sweepstakes Office (PCSO) for another year effective from 23 Aug 2018 to 22 Aug 2019.

HLIB’s VIEW

Positive news. We are positive on the extension of the equipment lease agreement as we had previously excluded the potential income from the PGMC after the expiry of existing contract in Aug 2018, albeit at a lower rate. While the actual rate is not disclosed, the lease rate is expected to be around 6% (from 7.7% previously) if references were to be made on the rate in the extension of lease agreement between PCSO and Pacific Online Systems Corporation (lotto online system supplier).

Cash bond agreement. While the quantum is unknown, we understand that the cash bond agreement works as collateral in place to ensure that PGMC delivers the terms of the leasing contract. We believe this has to do with the fact that PCSO failed to collect remittances from small town lottery operators, as exposed by the Commission of Audit (COA) in July.

Appeal process is still ongoing. PGMC is currently appealing the decision on the dispute of exclusive contractual right to supply the online lottery system in Luzon. To recap, the Arbitral Tribunal has, on 23 Feb 2018 ruled in favour of PCSO and ordered PGMC to pay all of PCSO's costs and expenses in the arbitration as well as reimburse the paid advance costs with a total amount exceeding RM5m.

Forecast. We lift our FY19/20/21 core PATMI forecasts by 4.2%/3.3%/0.3%; respectively after factoring in the upside from the contract extension as we have previously excluded the contribution from the lottery leasing operation post Aug 18.

Maintain HOLD, TP is raised to RM2.36 (from RM2.34) following the earnings adjustment, based on DCF valuation 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 - 2 Oct 2018