BToto reported 1H22 core net profit of RM48.1m (-66.9% YoY) forming 36.6%/33.0% of our and consensus expectations. We deem this to be above expectations as we expect 2H22 to be much stronger than 1H22 as operations have normalized. We increase our earnings forecasts by +30.2%/+6.1%/+6.1% for FY22/23/24 to account for the results shortfall in FY22 and higher anticipated gaming sales. We are positive that the pick-up in consumer activities should continue to bolster for sustained recovery in its NFO segment. Maintain BUY with a higher TP of RM2.40 (from RM2.26) based on DCF valuation with WACC of 7.4% and TG of 2%.

Above expectations. BToto reported 2Q22 core net profit of RM60.3m (1Q22: -RM12.2m, -14.3% YoY) which brought 1H22’s sum to RM48.1m (-66.9% YoY) forming 36.6%/33.0% of our and consensus expectations. We deem the results to be above expectations as we expect 2H22 to be much stronger than 1H22 as operations have normalised. The results beat was mainly due to stronger-than-expected recovery in the NFO segment. 1H22 core PATMI sum was arrived after excluding reversal of receivables write-off, provision for inventories write down, forex loss and fair value loss of investments amounting to RM12.5m.

Dividend. 1 sen, ex-date: 30 Mar 2022 (2Q21: 2.5 sen). 1H22: 2 sen (1H21: 6.5 sen).

QoQ. Revenue increased +56.1% contributed by its gaming (+6.9x) while partially offset by its motor dealership (-9.6%) segment. The steep increase in gaming revenue was due to more draws were conducted in current quarter (45 draws vs. 8 draws in 1Q22). Ticket sales per draw increased by +41.2% due to (i) healthy pick up in sales since business resumption in mid-Sept; and (ii) its Sarawak outlets (representing 6.6% of its total outlets) only opened on 1 Oct. Its motor dealership segment saw a decline in revenue as sales were negatively impacted by restrictions implemented by UK government towards the end of quarter over Omicron variant concerns. Core PATAMI rebounded strongly to RM60.3m (from -RM12.2m) in line with the improvement in its gaming segment.

YoY. Revenue was flattish at +0.9% contributed by motor dealership (+18.1%) but offset by gaming (-13.3%) segment. Gaming segment revenue decline was mainly due to the softer recovery after a long period of operations shutdown (3.5 months) during NRP Phase 1. The improvement in motor dealership segment was mainly due to higher sales in used car segment which benefitted from the continued market supply shortage in this segment. Core net profit declined by -14.3% mainly dragged by the decline in revenue from gaming segment (which has a higher margin) coupled with a higher prize payout during the quarter.

YTD. Revenue declined -20.8% dragged by gaming (-50.3%) while partially offset by motor dealership (+11.4%). Gaming revenue decline was due to the loss of 2.5 months of operating days in 1Q22 as well as the slower recovery post business resumption (ticket sales per draw declined by -21.2% compared to SPLY). The improvement in motor dealership segment is due to the same reason explained in the YoY paragraph above. Consequently, core net profit declined by -66.9% due to the decline in gaming revenue and weaker operating leverage as a result of the fixed costs incurred during the non-operating period.

Outlook. We gathered that the sales recovery for NFO continues to pick up pace and has currently recovered to c.80-85% of pre-Covid levels (compared to 70-75% in 2Q22). We also expect the group to record a seasonally stronger 3Q22 as NFO sales increase during CNY period. Furthermore, BToto’s Supreme jackpot has accumulated to a lucrative amount and currently stands at RM58.6m (3rd highest historically) which should attract increased interest and sales during the period.

Forecast. We increase our earnings forecasts by +30.2%/+6.1%/+6.1% for FY22/23/24 to account for the results shortfall in FY22 and higher anticipated gaming sales.

Maintain BUY, TP: RM2.40. Following our earnings adjustment, our TP is raised to RM2.40 (from RM2.26) based on DCF valuation with WACC of 7.4% and TG of 2%. We are encouraged by the positive sales recovery in the NFO segment. The pick-up in consumer activities following the economic reopening should continue to bolster for sustained recovery in the NFO sales. Furthermore, the robust sales in its luxury car dealership segment will continue to contribute positively to the group.

Source: Hong Leong Investment Bank Research - 23 Feb 2022