Lower FY18E Dividend Leads to Lower TP

We are maintaining our SELL call on BST, as we cut our DDM-based TP to RM2.20 (from RM2.58), on a lower FY18E dividend due to our earnings reductions of 6%, as we are not expecting a turnaround in FY18. The company’s FY17 PATAMI fell 22% to RM241mn, which only constituted 80% and 89% of our and consensus estimates. The fullyear dividend payout for FY17 was also lower at 14sen, relative to the 16.5sen cash dividend paid in FY16.

Malaysia Toto – Lower Revenue and Higher Cost

Although we have seen a surge in public service commercials by numbers forecast operators (NFO) to discourage gamblers from betting with illegal operators, we still believe that illegals provide better prize payouts, which makes legal operators like BST seem unattractive to bettors. Revenue for the segment fell by 1.7% yoy and PBT fell by 19.9% yoy in FY17 on higher operating costs and additional costs related to the GST adjustment. We expect the revenue decline to continue into FY18, albeit at a slower pace.

Philippines – There Could be More Downside Risk

We are of the view that there could be additional risk to the Philippines operation, as the Philippine Gaming Management Corporation (PGMC) is trying to lower operating lease payments, including to PCSO (entity owned by BST). They are currently in arbitration, while the previous contract is valid until Aug-2018. PCSO reported a decline in PBT by 7.3% yoy due to higher operating costs, while revenue grew marginally in FY17. We expect marginal growth for the segment as costs normalise in coming quarters.

Lower FY17 DPS a Negative Surprise

BST announced a full-year dividend of 14sen, which was lower than the 16.5sen cash dividend announced in FY16 (19.0sen if we were to include treasury shares). We and consensus had forecasted a lower DPS yoy at 16sen on weaker performance. As a result of the lower payout in FY17, we are lowering our FY18 DPS expectation to 14.5sen from 17sen.

Maintain SELL With a Lower DDM-based TP of RM2.20

We maintain our SELL rating for BST with a lower DDM-based 12-month target price of RM2.20 (discount rate: 7.6%; growth rate: 1.0%). We believe BST lacks catalysts as earnings growth remains challenging due to: 1) increasing illegal gaming activities, and 2) weak results by PCSO.

Source: Affin Hwang Research - 21 Jun 2017