We are maintaining our HOLD call on Berjaya Sports Toto (BST), with a slightly higher TP of RM2.35 as we roll over our DDM valuation base to FY19E. We also lift our EPS by 3% over FY18-20E, as core net profit at RM131.3m (-9.3% yoy) in 1H FY18 is tracking above our going in forecast, but is within consensus estimates. Although the Malaysia Toto operations have shown signs of improvement, we still believe that the low prize payout structure puts legal number-forecast operators (NFOs) like BST at a disadvantage to the illegal operators.

Malaysia Toto – High Jackpot Manged to Attract the Crowd

2Q FY18 Toto revenue delivered decent growth of 4.4% yoy and 6.2% qoq, driven by higher sales from its jackpot games due to the record high jackpot pool coupled with an overall higher number of draws during the quarter. Although the high prize pool from the jackpot games managed to bring in more sales, we don’t think BST is out of the woods just yet, as the traditional 4-digit games which used to contribute around 70% of its sales, are still facing stiff competition from the illegal operators.

Philippines Leasing – Costs Continue to be a Problem

Despite a stronger revenue growth of 2.7% yoy for 1HFY18, the segment’s PBT was still down by 12.3% yoy due to higher operating expenses incurred during the 1Q FY18. 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 – Volatility in New Models’ Launch

Overall performance for the segment has normalised in 2Q FY18, after a relatively strong performance during 1Q FY18. PBT for the segment in 1H FY18 was down by 4.3% yoy, due to the softer sales demand. The volatility in the performance is due to the timing of new car launches.

Lifting Our TP to RM2.35, But Maintaining Our HOLD Rating

We maintain our HOLD and lift our DDM-based 12-month TP to RM2.35 (discount rate: 8.0%; growth rate: 1.0%), from RM2.20, as we roll over our basis to FY19E (from FY18E). We believe BST’s earnings growth will be challenged by: 1) a lower payout structure relative to illegal shops, and 2) weak results at PCSO. Upside risk: lower-than-expected prize payout.

Risks to Our Call

Key upside risks to our call include: 1) a lower-than-expected prize payout, and 2) better-than-expected revenue per draw day from Malaysia Toto. Key downside risks to our call include: 1) a higher-than-expected prize payout, and 2) higher-than-expected costs for the Philippines leasing segment.

Source: Affin Hwang Research - 19 Dec 2017