The MCO has led to the closure of NFO operations for 1 month (13 draws) which impacts BToto’s bottom-line by c.9%. We gather that sales/draw was still holding up in the month of Feb-Mar (pre-MCO) despite the initial Covid-19 wave. Note that most of the outlets (over 600 across Malaysia) are operated by agents, whereby the overhead expense required to run NFO outlets are incurred by the respective agents. We maintain our forecast and HOLD recommendation with an unchanged TP of RM2.26.

Malaysian closures. The Movement Control Order (MCO) has led to the closure of NFO operations for 1 month which amounts to 13 draws (including 1 special draw). A rough calculation implies that this reduction of draws would impact BToto’s bottom line by c.9%. We gather that sales/draw was still holding up in the month of Feb-Mar (pre-MCO) despite the initial Covid-19 wave which began late-Jan.

Potential initiatives post-MCO. We do not discount the possibility of special draws increasing to offset the tax revenue lost from the MCO. Note that the number of special draws has been decreased to 8 days (from 22 days) over the past two Budget announcements. The possibility remains uncertain at this juncture given the recent change in governing administration. Given that most of the outlets (over 600 across Malaysia) are operated by agents, the overhead expense required to run NFO outlets are incurred by the respective agents. This essentially helps to partially cushion BToto’s profits from the MCO closures as the impact is largely seen from the absence of commissions to be derived from the gross sales of outlets.

Philippine Gaming Management Corporation (PGMC)’s bid. To recap, the court had ruled in favour of Philippine Charity Sweepstakes Office (PCSO) with regards to a protest filed by PGMC as they were disqualified over minor issues despite being the only eligible candidate. As such, the rebidding process will continue with the timeline uncertain at this juncture. Nonetheless, PGMC is still operating on monthly contracts with PCSO until Aug-20. We expect this to likely continue for the next year or so given the uncertainty in rebidding process commencement.

UK operations. H.R. Own, a luxury car distributor based in the UK is not sparred from the ongoing pandemic. We gather from management that outlets were experiencing a slowdown in footfall over the past weeks preceding to the social distancing measures implemented. We expect the UK operations to be hit in 4Q20 given the lower volume alongside ongoing rental expenses from its outlets. Any temporary rental-free period by the landlords, if any, would serve well for this segment.

Dividend. Dividend declarations are largely dependent on the Malaysian operations and as such, we may potentially see FY20’s full year dividend to come in just short of the initially anticipated 16 sen in order to manage its cashflow during the MCO.

Forecast. Unchanged.

We maintain HOLD with an unchanged TP of RM2.26. Our valuation is based on DCF valuation with an unchanged WACC at 8.8% and TG of 1.5%. We feel that BToto remains unexciting with the lack of fresh catalyst given the challenging operating environment amid rampant illegal operators. Nonetheless, dividend yield of 6.6% offers the saving grace.

Source: Hong Leong Investment Bank Research - 9 Apr 2020