Good Quarter, But Unsustainable

We are upgrading our rating on Berjaya Sports Toto (BST) to HOLD from Sell on valuation grounds after the pullback in its share price, while maintaining our RM2.20 target price. Although 1QFY19 core net profit at RM85m (+23.5% yoy) achieved 30% of our and the consensus forecast, we do not think that the earnings momentum is sustainable. BST also announced a 4sen DPS, which is in line with expectations.

Malaysia Toto – Tax Holiday Period Drives Earnings Growth

Segment revenue for 1QFY19 was flattish yoy (+0.2% yoy), due to fewer draw dates and also lower demand during the World Cup season during the quarter. However, PBT increased by 44%, which management attributed to the lower prize payout and also lower operating expenses during the quarter. We believe that the lower opex was due to the tax holiday from June-August 2018 (3 months), as BST was absorbing the cost of GST previously. Under the new SST regime, there is no change in the cost structure, which is similar to the GST regime for BST.

Philippines Leasing – Still Uncertain Outlook

In local currency terms, the segment revenue was also flat yoy, but pretax profit registered an increase of 12.2% yoy, due to lower opex relative to the previous year. The leasing fee that Philippine Gaming Management Corp (PGMC) currently enjoys is expected to have ended by August 2018, as they have recently lost an arbitration case that allowed PGMC to claim exclusivity as an online lottery lessor to PCSO in Luzon, in our view. Management has filed an appeal to the court, but the petition is still pending.

UK Motor Division – Improving Profitability Drives Earnings Growth

PBT for the segment increased by 35.4% yoy to RM20.9m, despite revenue growth of 4.2% yoy. The improved result was due to favourable sales mix and also higher car sales volume.

Maintaining TP at RM2.20 and Upgrading to HOLD

We make no change to our EPS forecasts and DDM-based TP of RM2.20. However, we upgrade our call to HOLD, due to the limited downside from current levels. Key upside/downside risks to our call: enforcement activity on illegal betting operators, and changes in number of draw days

Source: Affin Hwang Research - 20 Sept 2018