While 1Q18 results were in-line, we believe the 2nd straight quarter of earnings recovery should cushion falling share price, which is still not abating. In addition, ticket sales also showed positive sign and we believe it should be bottoming out. At CY18 PER of 9.6x, this is a new low for more than two decades, which is highly unwarranted. Even at high prize pay-out of last year level of >63%, new implied PER of 11x still look attractive. Maintain OUTPERFORM at price target of RM2.95/DCF share.

1Q18 in line. BJTOTO reported 2nd straight quarter of earnings recovery in 1Q18 with net profit up 3% sequentially to RM74.3m which matched expectations as it made up 23%/26% of house/street’s FY18 estimates. It declared 1st interim NDPS of 4.0 sen (ex-date: 06 Oct; payment date: 24 Oct) in 1Q18 which is the same as 1Q17 but higher than 3.0 sen paid in 4Q17.

Luck factor and higher auto sales led earnings higher. Despite flattish revenue, 1Q18 earnings rose 3% QoQ to RM74.3m which was largely driven by favourable luck factor coupled with higher HR Owen (HRO) earnings, which were due to higher new and used vehicle sales. In fact, although NFO revenue fell 4% primarily attributed to lower draw day of 42 against 44 in 4Q17, NFO earnings leapt 15% to RM109.7m as estimated prize payout ratio (EPPR) improved to 62.1% from 64.3% previously. On the other hand, average ticket sales per draw were maintained at RM20.2m which is a good sign of sustainable ticket sales. Meanwhile, share of associate earnings swung back to loss of RM1.8m from profit of RM7.1m as 4Q17 income was attributed to revaluation surplus of an associate investment holding company in the Philippines.

Yearly results also helped by auto sales. 1Q18 earnings jumped 27% YoY from RM58.7m in 1Q17, as revenue rose 3%, which were largely driven by HRO as mentioned above while NFO segment reported lower operating profit by 3% as ticket sales fell 2% due to less one draw day at 42 from 43 previously with EPPR and average ticket sales per draw remained about the same at 62.1% and RM20.2m, respectively. Meanwhile, the other reason of stronger YoY earnings was much lower operating loss for Investment & Others segment at RM3.7m from RM20.1m in 1Q17.

Luck factor and ticket sales remain keys to earnings. Like its peer

MAGNUM (MP; TP: RM2.17), BJTOTO also faced the same problem of volatile luck factor and lacklustre ticket sales in the past four years which raised concerns of earnings sustainability to support dividend payout. Having said that, both NFO players have reported improved ticket sales in the past 2-3 quarters which is a good sign, although it is still too early to conclude a recovery of ticket sales. Coincidentally, both companies also reported better luck factors in recent quarters which helped to boast earnings. However, we will place more attention to ticket sales as EPPR is purely a luck factor.

New low again, OUTPERFORM maintained. Share price of BJTOTO dropped further by another 10% in the past three months, or 22% YTD, which implies CY18 PER of 9.6x with supernormal yield of 8%. Even if we align FY18 EPPR assumption to FY17 level of 63.6% from our assumption of 61%, a 20% earnings cut, the new implied CY18 PER of 11x is still very attractive. As such, we believe the continuous price selldown is overdone. We keep our OUTPERFORM and price target of RM2.95/DCF unchanged. Downside risks to our call include persistent declining ticket sales and higher-than-expected EPPR.

Source: Kenanga Research - 21 Sept 2017