We upgrade Berjaya Sports Toto (BST) to a HOLD, while keeping our TP unchanged at RM2.20, as we believe that the stock is fairly valued. 1QFY18 core net profit at RM68.7m (-1.7% yoy) is tracking above our expectations, but in line with the consensus, as it constitutes 28% and 25% of our respective forecasts. The beat was mainly due to a better-than-expected performance from the UK operation whose PBT more than doubled. A 4.0sen interim dividend was also declared.

Malaysia Toto – Still Not Out of the Woods

Revenue for the segment continued on a declining trend, down 2.3% yoy in 1QFY18, but PBT grew by 2.3% yoy due to the lower prize payout. Although the revenue per draw day has only fallen by 0.1% yoy, better than our -1.5% yoy forecast, it is still too early to conclude that the recent increase in public service commercials has successfully discouraged gamblers from betting with illegal shops, in our view. If the revenue per draw day can be sustained, there could be upside risk to our forecasts.

Philippines Leasing – Higher Cost Amplifies the Problem

BST’s Philippine leasing operation recorded a 4.6% yoy decline in revenue, and 25.2% yoy decline in PBT for 1QFY18. The reduction in revenue was per our expectation, but the magnitude of the increase in operating expenses was above our expectation. As we are of the view that the Philippines Gaming Management Corporation (PGMC) is still trying to lower its current operating lease payments to PCSO (entity owned by BST), the profitability of the segment could deteriorate further.

UK Motor Division – Delivered Earnings Beat

PBT for the segment has more than doubled to RM15.5m in the quarter (~10% of group PBT), due to the better sales volume, favourable forex movement, and write-back of its inventories. However, given the recent strengthening of the Ringgit and one-off nature of the write-back, we believe the growth rate experience in 1QFY18 may not be repeated.

Upgrade to HOLD From SELL With Unchanged 12-month TP of RM2.20

We upgrade BST to HOLD on valuation grounds with an unchanged DDMbased target price of RM2.20 (discount rate: 7.6%; growth rate: 1.0%) We believe its earnings growth will remain challenging on: 1) a lower payout structure relative to the illegal shops, and 2) weak results by PCSO.

Source: Affin Hwang Research - 21 Sept 2017