We believe that the group will recover strongly in 2HFY22 and remain committed to a high dividend payout given the better earnings visibility (post business resumption) and absence of big capex spending in Malaysia. The lucrative Supreme jackpot amount and a seasonally stronger CNY should also bolster for stronger sales and a speedy recovery in its NFO segment in 2HFY22. Furthermore, the robust sales in its luxury car dealership segment will continue to contribute positively to the group. Maintain BUY with an unchanged TP of RM2.40 based on DCF valuation with WACC of 7.4% and TG of 2%.

Recap. BToto reported 2QFY22 core net profit of RM60.3m (1QFY22: -RM12.2m, -14.3% YoY) which brought 1HFY22’s sum to RM48.1m (-66.9% YoY). 1HFY22 earnings were mainly dragged by the loss of c.2.5 months of operating days in its NFO segment. NFO revenue in 2QFY22 was around c.73% compared to the same period in FY19 (pre-Covid).

Expecting better dividend payout in 2HFY22. In 2QFY22, the group declared DPS of 1 sen, which brought 1HFY22’s sum to 2 sen (1HFY21: 6.5 sen). As BToto is known as a stable dividend counter, the 1 sen DPS declared may be perceived as low at first glance (vs. 3-5 sen of quarterly DPS historically). Nonetheless, if we compare 1HFY22 DPS to its reported EPS, the dividend payout ratio was 75.5%, which is in line with its historical payout ratio of >75%. Thus, we are not overly concerned on the lower DPS figure as it was mainly dragged by the loss in 1QFY22. Note that 1HFY22 core earnings only made up of 28.1% of our full year forecast. As such, we expect most of the dividend payout to be back loaded in 2HFY22. We are projecting a full year FY22/23 DPS of 8.5/11 sen, representing 67/69% payout ratio, respectively, which translates to projected CY22 dividend yield of 6.7% (as we look beyond 1HFY22). We project a lower payout ratio as BToto’s dividend will be funded by the cash flow from its NFO segment. The profits from its car dealership are unlikely to be repatriated to Malaysia due to (i) tax on foreign income; and (ii) the cash is likely to be used to fund its expansion in Hatfield.

Snowballing Supreme jackpot. BToto’s Supreme 6/58 jackpot currently stands at RM65.6m (which is the second highest sum in history after Grand Toto 6/63 of RM69.6m was won in Sept 2017). Based on our calculation, Supreme jackpot collection contributed to c.6% of 2QFY22 NFO revenue. YTD CY22, the stake collection per draw for this jackpot has more than doubled (+1.7x), while on an average basis, 2MCY22 stake collection has also more than doubled (+1.5x) compared to 4QCY21. As the jackpot snowballs to a bigger amount, each draw will attract a higher amount of sales compared to the previous draw (see Figure #1). We believe that the current lucrative sum in the jackpot will serve as a free marketing tool for the group through word of mouth, while BToto is also capitalizing on it by promoting this jackpot on its social media channels (see Figure #2). In addition, the jackpot should also have a positive spill over effect for its NFO business as it attracts more interest and bolsters for the return of punters to try their luck in the game.

Forecast. Unchanged.

Maintain BUY, TP: RM2.40 based on DCF valuation with WACC of 7.4% and TG of 2%. Current share price is languishing and trading at -22.7% discount to the average price in 2019 (pre-Covid price level). We believe that the steep discount is unjustified given that (i) its NFO sales has already recovered to c.85% currently compared to pre Covid level in 2019; and (ii) its luxury car dealership segment has improved significantly (segment contribution to EBIT improved to 22.2% in FY21 from 13.1% in FY19). All in all, we believe that the group will recover strongly in 2HFY22 and remain committed to a high dividend payout given better earnings visibility (post business resumption) and the absence of big capex spending in Malaysia. The lucrative Supreme jackpot amount and a seasonally stronger CNY should also bolster for stronger sales and a speedy recovery in its NFO segment in 2HFY22. Furthermore, the robust sales in its luxury car dealership segment will continue to contribute positively to the group.

Source: Hong Leong Investment Bank Research - 9 Mar 2022