Btoto’s 9MFY19 core PATMI of RM190.5m (+3.6% YoY) was below expectations due to higher-than-expected operating cost. 3QFY19 reported weaker YoY and QoQ earnings mainly due to higher prize pay-out and lower lease rental income by PSCO which was slightly offset higher car sales and margin. 9MFY19 higher earnings were due to improvement in car sales thanks to delivery of new car models. We cut our FY19/20/21 earnings forecast by 8.9%/6.9%/4.6% respectively to account for higher operating cost. We also take this opportunity to reduce our dividend payout assumption. Maintain HOLD and lower TP of RM2.31 based on DCF valuation.

Below expectations. 9MFY19 revenue of RM4.2bn translated into core PATMI of RM190.5m, accounting for 69% and 68% of HLIB and consensus full year forecasts, respectively. The downward surprise was a result of higher-than-expected operating cost mainly from higher-than-expected prize payout.

Dividend. Declared 3rd interim dividend of 3.5 sen (2QFY18: 4.0 sen) per share going ex on 10 April 2019, bringing YTD dividend to 11.5 sen, translating to an annualized yield of 6.3% at current price.

QoQ. Revenue increased marginally by 0.7%, whereas core PATMI declined by 1.5%. PATMI was pulled back by weaker performance from PGCM due to lower lease rental income from PCSO, despite the improvement in sales in new car by H.R Owen and lower prize payout from Sports Toto.

YoY. Revenue and core PATMI declined by 3.0% and 6.3% respectively. The weaker earnings were due to lower car sales by H.R Owen and lower lease rental income by PCSO, which was further dragged by fewer draw days and higher payout in the Malaysia segment.

YTD. Revenue declined by 1.1% due to lower revenue reported by all segments, however, core PATMI improved by 3.6%. The improvement in earnings was mainly due to higher car sales from H.R Owen thanks to the delivery of new car models. However this was slightly offset by higher prize payout and high operating expenses by PGMC.

Sports Toto operation. Overall, Sports Toto operation posted higher sales per draw (+5.2% QoQ; +3.1% YoY) mainly supported by 4D Jackpot and 4D. Nonetheless this was slightly dragged by weaker performance of Lotto games.

Forecast. We cut our FY19/20/21 earnings forecast by 8.9%/6.9%/4.6% respectively to account for higher operating cost. As the group showed a lower payout, we take this opportunity to also reduce our dividend payout assumption.

Maintain HOLD, with slightly lower TP RM2.31 (previously: RM2.36) 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 coupled with challenging operating environment amid rampant illegal operators and opine that dividend is acting as its last saving grace

Source: Hong Leong Investment Bank Research - 19 Mar 2019