BToto has proposed to transfer its Malaysian NFO business, which was valued at RM6.0b, to form a Business Trust and list it in Singapore. Although shareholders are expected to receive a special dividend (c.49sen) in the near term, we view the deal negatively as BToto could face dividend cut and a de-rating, where its valuation will fall from RM4.52/DCF share to RM4.25/SOP share. We see a floor value of RM3.87/share, which implies a 10% holding company discount to its SOP. In addition, the unit prices of most of Business Trust companies listed on SGX-ST had performed poorly since their listing. Thus, to spin off the NFO and to list it as a Business Trust may not be a good idea. As such, we are downgrading BToto to an UNDERPERFORM with a new TP of RM3.87/share. SWITCH to MPHB (OP; TP: RM3.72). 

To spin off jewel business.  Yesterday,  Berjaya Sports Toto Bhd (BToto) announced  a  proposal  to  spin  off  its  core  business,  namely  Sports  Toto Malaysia  Sdn Bhd (STM), to form a business trust known as Sports Toto Malaysia Trust (STMTrust), for RM6.0b, and will be listed on  the Main board of the Singapore Exchange Securities Trading Ltd (SGX-ST) by mid-Nov  this year. Upon listing, it will raise c.RM1.24b from the exercise and BToto's effective stake in the NFO business will fall to 79.5% (in STM-Trust) from 100% (in STM) previously.

Valuation on NFO business is fair. While the unit price for STM-Trust has yet to be determined (via a bookbuilding exercise), the RM6.0b price tag for STM is fair and well within our estimated DCF value of RM5.8b. Under the proposal, the RM6.0b consideration will be satisfied via 1) the issuance of 4.43b units of STM-Trust to BToto's indirect wholly-owned Berjaya Sports Toto  (Cayman)  Ltd (BToto Cayman) for a total value of SGD2.21b (c.RM5.47b) at an issue price of SGD0.50 and 2) the balance SGD213.4m (c.RM527.4m) by way of a promissory note or bill of exchange to BToto.

To raise RM1.24b from listing exercise.  The proposed listing will involve 1) the issuance of up to 460.0m new STM-Trust units and 2) an offer for sale/placement by BToto Cayman of up to 540.0m STM-Trust units. That said, based on the indicative issue/offer price of SGD0.50/unit, BToto would raise c.RM667.4m from the offer for sale/placement that could be distributed  as a special dividend (c.49sen/share) to shareholders while the new issuance units, which would raised c.RM568.5m, would be utilised for payment to STM (to discharge the promissory note or bill of exchange), listing expenses and working capital purposes.

Short term gain, long term pain! We view the deal negatively as the valuation of BToto is poised for a de-rating under such a proposal. While a c.49sen special dividend is probable in the near term, the valuation of BToto will immediately fall to RM4.25/SOP share from RM4.52/DCF share. Post-corporate exercise, BToto's  valuation  will  decline  to  RM3.38/share  on  a  10%  discount  to  SOP  for  being  an investment holding company, assuming the value of STM-Trust remains at RM6.0b. In addition, data from Bloomberg showed that most Business Trust companies listed on SGX-ST had performed poorly. Thus, to spin  off  STM  and  list  it  as  Business  Trust in Singapore may not be value-accretive to BToto, in our view.

Cut to UNDERPERFORM.BToto's FY13-FY14 EPS and GDPS are set to fall by c.9% and c.20% respectively as its effective stake in the NFO business falls to 79.5%. We now value BToto at a floor value of RM3.87/share (a 10% holding company discount to its SOP valuation plus a potential 49 sen special dividend) from RM4.52/DCF share previously. At RM3.87/share, the stock is  valued at CY13 12.8x PER, which is still higher than that of 11.7x of  Multi-purpose Holdings Bhd ('MPHB', OP; TP: RM3.72). As such, we are downgrading BToto to an UNDERPERFORM from a MARKET PERFORM. SWITCH to MPHB.