We believe that Berjaya Sports Toto’s (BST) earnings will likely take a hit if the government decides to go ahead to reduce the number of special draws in 2019, as part of the government plan to reduce the social impact related to gaming. Details of the cut will only be revealed in the upcoming budget 2019 on Nov 2. Based on our estimates, BST netted c. RM17m in revenue for each draw day in FY18. Reiterate SELL.

Cut Down in Draw Days in No Good for NFOs

The reduction in draw days will have a negative impact on overall revenue, as the increase in revenue per draw day is unlikely to compensate for the loss of a draw day, in our view. The cut in draw days is also likely to reduce the attractiveness of jackpot based games as we believe it might take a longer period for jackpot games to accumulate a sizeable prize pool to attract more customers. As the industry is already facing fierce competition from the illegals operators, the cut in draw days will certainly not do the NFOs any favours.

Impact on Earnings to be Felt in FY20E

As the cut in draw days will only start in 2019, the full impact of the cut is likely to be reflected in BST earnings in FY20E. The negative impact in FY19E will be cushioned by an earnings boost during the “tax-free” period from Jun-Aug’18 (3 months). Based on our estimates, the net profit of BST is likely to reduce by 0.5%-1.0% for each draw day withdrawn. As BST is already expected to payout close to 90% of its profit as dividend, a cut in earnings will also likely lead to a lower DPS.

Maintain SELL With An Unchanged TP of RM 2.20

We are keeping our SELL and DDM-based TP at RM 2.20 unchanged at the moment, pending the details from the government on the cut of special draw day. We expect the cut in draw days to further contribute to the declining betting revenue, which is facing intense competition from the illegals operators. Upside risk to our call are 1) increased enforcement on illegal betting operators and 2) a more favourable tax structure.

Source: Affin Hwang Research - 8 Aug 2018