BToto reported 1Q22 core LATAMI of -RM12.3m (4Q21: RM34.9m; 1Q21: RM75m) which was below our and consensus expectations. The results deviation was due to the loss of operating days during the quarter. We gathered that current ticket sales are around c.70-75% of pre-Covid levels (since the resumption in mid-Sept). Maintain BUY with a lower TP of RM2.26 (from RM2.40) based on DCF valuation with WACC of 7.4% and TG of 2% following our earnings adjustment and as we rollover our valuation base year to FY22. We continue to like the company for its vast growth potential in the luxury car dealership segment and its decent projected dividend yield of 4.6% for FY22.

Below expectations. BToto reported 1Q22 core LATAMI of -RM12.3m (4Q21: RM34.9m; 1Q21: RM75m) which was below our/consensus expectations of full year profit forecasts of RM229m/RM168m. The results deviation was due to the loss of operating days during the quarter. Our core LATAMI sum was arrived after adjusting for provision/write-off of inventories (+RM5.5m) and reversal of provision/write-off of receivables (-RM0.2m).

Dividend. 1.0 sen going ex on 16 Dec 2021 (1Q21: 4.0 sen).

QoQ. Revenue declined -29.2% due to the decline in its gaming segment (-83.5%) partially offset by the increase in its motor dealership segment (+6.9%). Gaming segment suffered as it only had 8 draws (vs. 28 draws in 4Q21) during the quarter. Ticket sales per draw declined -42.2% mainly due to (i) stricter SOPs in the outlets (only vaccinated individuals are allowed entrance); (ii) slower pick up rate during initial resumption of operations; and (iii) its Sarawak outlets (representing 6.6% of its total outlets) only opened on 1 Oct. Its motor dealership recorded a 6.9% improvement in revenue due to the lifting of UK lockdown restrictions in July 2021. Subsequently, the group recorded core net loss of -RM12.3m (from RM34.9m) due to the decline in gaming revenue and the fixed costs incurred during the quarter.

YoY. Revenue declined -40.7% due to the decline in its gaming segment (-88.7%) partially offset by the increase in its motor dealership segment (+6%). Gaming segment revenue declined as the group only had 8 draws (vs. 42 draws in 1Q20). Ticket sales per draw declined -40.5% due to the same reasons as highlighted in the QoQ paragraph above. Subsequently, the group recorded core net loss of -RM12.3m (from RM75m) due to the decline in gaming revenue and the fixed costs incurred during the quarter.

Outlook. BToto NFO outlets resumed operations since 14 Sept 2021. We gathered that current ticket sales are only around c.70-75% of pre-Covid levels (vs.c.80-85% post-MCO1.0). We believe that the prolonged shutdown of NFOs (3.5 months) had further aggravated the shift of betting towards the illegal operators as punters were not able to place their bets through the legal NFOs during this period, resulting in a decline in market share for the legal NFOs. Nonetheless, BToto continues to work closely with the police to clamp down on the illegal operators which should help to mitigate this issue. On the other hand, its luxury car dealership segment continues to see robust growth aided by the pick-up in demand from high net worth individuals as they spend more on luxury goods given that they were not able to spend on traveling due to travel restrictions. The luxury car dealership segment has now grown to be a significant earnings contributor for the group (22.2% of operating profit in FY21) which should help to cushion the impact of a slower recovery in the NFO segment.

Forecast. We decrease our FY22/FY23 earnings by -42.7%/-14.9% mainly to reflect the loss of operating days in FY22 as well as the slower-than-expected recovery and a lower market share in the NFO segment. We introduce FY24 forecasts.

Maintain BUY, TP: RM2.26. Following our earnings adjustment and as we rollover of our valuation base year to FY22, our TP is lowered to RM2.26 (from RM2.40) based on DCF valuation with WACC of 7.4% and TG of 2%. While we note that the recovery of the NFO segment is unlikely to recover to pre-Covid levels in the near term due to (i) lower visitation from the working adults (as a result of hybrid / WFH arrangements); and (ii) stiff competition from illegal NFOs, we believe that this has been largely priced in by the market as share price is currently trading at -15.3% discount to the average price in 2019 (pre-Covid price level). We continue to like the company for its vast growth potential in the luxury car dealership segment and its decent projected dividend yield of 4.6% for FY22.

Source: Hong Leong Investment Bank Research - 19 Nov 2021