BToto’s wholly owned subsidiary BPI’s ownership in PGMC had reduced from 99.9% to 39.9%, the disposal and dilution of shares is mainly to increase local shareholding in the company. Local participation is expected to lift its wining chances for the upcoming open bid. The group is confident on winning another year of the PCSO contract to ensure smooth transition. However we had previously taken a more conservative stance by removing all contribution from PGMC after Aug 2019. We maintain our forecast, as our earnings forecast from PGMC ends in Aug 2019. Maintain HOLD with unchanged TP of RM2.46 based on DCF valuation.

NEWSBREAK

BToto’s wholly owned subsidiary, Berjaya Philippines (BPI) announced its disposal of 1m common shares of Philippine Gaming Management Corporation (PGMC) for a cash consideration of PHP117m (~RM9.4m). Following the disposal, PGMC issued additional 5m common shares bringing PGMC’s total outstanding shares to 10m shares. The additional issued shares diluted BPI’s holding to ~40% from ~80%. With that, PGMC has ceased to exist as a subsidiary of BPI (now an associate).

For the uninitiated, PGMC’s main business is the leasing of lottery terminals and providing maintenance thereof to the Philippine Charity Sweepstakes Office (PCSO) pursuant to the Supplemental Equipment Lease Agreement, which will expire in August 2019.

HLIB’s VIEW:

Local participations would lift wining chances for open bid. After the above mentioned two corporate exercises, the PGMC is now 60% owned by locals. Management mentioned that this is to facilitate the open bidding process for the PCSO contract, as it reckons that local participation could help increase its chance of winning the bid.

PGMC contribution. Usually PGMC contributes about 25% to BToto’s core earnings. With the possibility of losing this main source of income, earnings will be negatively impacted. Nonetheless, management highlighted that they have a high chance of renewing the contract for another year to facilitate the smooth transition to the next winner. However, we had previously taken a very conservative stance of removing all contribution from PGMC, leaving its contribution only up to Aug 2019 (2 months contribution to FY20).

Forecast. Unchanged, as the impact is minimal to our FY20 earnings (the 60% loss of 2 months contribution from PGMC equates to roughly 2% of total earnings).

Maintain HOLD, with unchanged TP RM2.46. Our valuation is 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. Nonetheless, dividend yield of 5.7% is the saving grace.

Source: Hong Leong Investment Bank Research - 9 Jul 2019