Sales have been gradually increasing (since its resumption) and hovers around 85% of its pre-MCO levels, which we opine is rather commendable given the current economic circumstances. We do not rule out the possibility of an increase in NFO special draws (which provides additional government contribution of 10% from net sales). We gather that the NFOs have tried to approach the government to replace its draws lost during the MCO. We cut our FY21/22 forecast by -10.9%/-6.5% and we lower our FY21 dividend forecast to 13 sen (from 14 sen), in line with our earnings forecast change. We maintain HOLD with a lower TP of RM2.05.

Sales were gradually normalising. We gather from management that sales have been gradually increasing (since its resumption) and hovers around 85% of its pre MCO levels, which we opine is rather commendable given the current economic circumstances. To recap, BToto had resumed operations in mid-June after losing c.37 draws from the closure during MCO. We caution that sales levels may remain impacted with the latest wave of Covid-19 and increased targeted lockdowns taking place. On a more positive note, outlets are allowed to continue operating during the ongoing CMCO in the Klang Valley (249 outlets are located in Klang Valley out of the total 680 outlets in Malaysia).

Government initiatives which can uplift sales. In light of the government’s budgetary constraints, we do not rule out the possibility of an increase in NFO special draws (which provides additional government contribution of 10% from net sales) which was previously decreased to 8 draws from 22 draws over the past two Budget announcements. We gather that the NFOs have tried to approach the government to replace its draws lost during the MCO. Tighter measures by the government to curb illegal market activities, which is estimated to be larger than the legal market, also seems likely as it would help shift demand towards the legal NFOs which in turn generates additional tax revenue.

UK operations. The luxury car distribution business, H.R. Owen had resumed operations back in July. We gather that orders have been picking up albeit still relatively weaker than pre-Covid levels. Notably, the segment remains operationally profitable. With regards to cost management, management has narrowed down its outlet operations to focus its resources efficiently and manage costs. Furthermore, some outlets had successfully received renegotiated rental rates during this period.

Dividend. Dividend declarations are largely dependent on the Malaysian operations and as such, we expect to company to continue declaring dividends as long as sales volume maintains at current levels.

Forecast. We cut our FY21/22 forecast by -10.9%/-6.5% as we conservatively impute slower sales activities given the heightened risk of ongoing economic impact brought about by Covid-19. Subsequently, we lower our FY21 dividend forecast to 13 sen (from 14 sen), in line with our earnings forecast change.

We maintain HOLD with a lower TP of RM2.05 (from RM2.20). Our valuation is based on DCF with a WACC of 7.5% and TG of 1.0%. 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 6.7% offers the saving grace

Source: Hong Leong Investment Bank Research - 3 Nov 2020