We are maintaining our SELL call on Berjaya Sports Toto (BST) due to its challenging outlook given unfavourable structural issues beyond its control. Although the recent reported core net profit of RM260m (- 0.3% yoy) is still within both consensus and our expectations - delivering ~ 100% of our respective forecasts, the FY18 DPS at 16sen fell short of our 16.5sen estimate.

Malaysia Toto – Slight Revenue Decline for FY18

Revenue growth for FY18 is flattish yoy, which we believe is supported by higher revenue from the Jackpot based games due to the record prize pool accumulated during the quarter. However, PBT is down 9.2% yoy, as the prize payout normalised in FY18. Although the 3-months tax-free period would be a boost in margin for BST in FY19E, demand for traditional 4-digit games are on a structural decline, due to more lucrative payouts from the illegals. Unless there are changes to the regulation, demand for the segment is likely to be stagnant at best in the long-run.

Philippines Leasing – Weaker Outlook Leads to Write-downs

The segment reported a drop in revenue and pre-tax profit of 5.8% and 12.7% yoy, due to continued weakness in its current operation and unfavourable forex translation. In addition, the group has impaired goodwill of around RM11m during the quarter, which we believe is an indication of the challenging operation environment. The recent arbitration award which rules that PGMC does not have exclusive rights to supply online lottery system for Luzon, will likely force PGMC to lower its price to maintain competitiveness starting in mid-FY19E.

UK Motor Division – Improving Profitability Drives Earnings Growth

PBT for the segment has more than doubled in FY18, due to a significant improvement in margin, benefiting from favourable sales mix despite a marginal 0.3% yoy drop in revenue. The strong profit growth for the year in encouraging, but the overall contribution is still relatively small.

Maintaining TP at RM 2.20 and SELL Unchanged

Minor change in EPS forecast, while maintaining our SELL call, with an unchanged DDM-based TP of RM2.20. Upside risks: no further taxes implemented on BST; increased enforcement on illegal betting operators.

Source: Affin Hwang Research - 19 Jun 2018