We believe that Berjaya Sports Toto (BST) 6MFY20 core-PATAMI of RM121.3m was well within our and consensus expectations, delivering 50% and 47% of our respective full-year forecast. The Malaysian operations in 2QFY19 recorded a 6.1% revenue growth qoq, driven by stronger sales of its 4D Jackpot games, wherein growth tends to fluctuate based on the accumulated prize pool. We raise our DDM-based TP to RM2.30 to factor in a possible OPR cut but keep our SELL call unchanged.

Uptick in Malaysia Revenue Due to Higher Prize Pool

We believe that the increase in revenue qoq to RM849m (+6.1% qoq) for the 2QFY20 was mainly driven by the attractiveness of the high prize pool of its Jackpot games, which is not sustainable as the prize pool takes time to accumulate across quarters. Despite the improvement in 2QFY20, revenue per quarter is likely to maintain at around RM800m/quarter for the year (RM825/m quarter for 6MFY20). We believe that sustainable market share gain will be challenging, as most illegal operators have “legalised” their operation by moving online.

Margin Improvement Is Due to Lower Car Sales

The improvement in EBIT margin in 2QFY20 to 7.7% from 6.4% was due to the increased contribution from the higher margin lottery business, as revenue for the motor vehicle operation recorded a 10.7% decline in revenue qoq. Although the motor vehicle division contributed close to 38% of the group revenue in 2QFY20, contribution to BST’s EBIT is merely 7%, due to its low profit margin. EBIT margin for the lottery operation for 2QFY20 was at 12.4%, an improvement from the 11.9% in 1QFY20, but still well within our expectation.

Reiterate SELL Call, TP Raised to RM2.30

We have tweaked our EPS forecast for FY20-21 by 0.2%-0.4% to factor in 6MFY20 performance. We also raise our DDM-based 12-month TP to RM2.30 (from RM2.10), to factor in a possibility of a further cut by BNM in its OPR in 2020. Nevertheless, we are keeping our SELL rating, as we believe earnings growth is likely to remain challenging for BST. Key upside risks to our call: enhanced enforcement activity on the illegal operators, and increase in the number of special draw days.

Source: Affin Hwang Research - 19 Feb 2020