BToto's annualised  1QFY13  numbers  were  largely  within  our  and  consensus expectations.  Its  relatively  stable  and  defensive  earnings  as  well  as  the  strong likelihood of an upside dividend surprise make it an ideal stock to hold amid thecurrent  volatility.  The  share  price  is  supported  by  a  net  dividend  yield  of  6.2%, which may potentially rise to 7.3%, assuming a 100% payout ratio. Maintain BUY, with an unchanged FV of RM5.01.

In  line.  After  stripping  out  RM8.8m  in  an  exceptional gain on  the  disposal of  unquoted investments,  BToto's annualised  1QFY13  earnings  were  largely  in  line,  at  24.2%  and 23.8%  of  consensus  and  our  full-year  forecasts  respectively.  Its  key  subsidiary,  Sports Toto Malaysia, registered revenue and pre-tax profit growth of 6% and 15% respectively. Revenue growth was primarily driven by stronger Jackpot sales, while the growth in pre-tax profit relative to revenue got a boost from a lower prize payout ratio. Sequentially, its core  Sports  Toto  gaming  business  registered  a  revenue  compression  of  1.8%  q-o-q, given the traditionally stronger 4Q period. However, pre-tax profit expanded 24.4% q-o-q on  the  back  of  lower  prize  payout  ratios.  The  group  declared  a  first  single-tier  interim dividend per share of 6.5 sen (vs 1Q12's  8  sen),  representing  a  payout  ratio  of  77.6% and lower than our full-year assumption of 87%. However, we believe that there is scope for  payouts  to  normalise  upwards  over  the  course  of  the  year  and  sustain  at  relatively high  levels  of  85%  to  95%,  once  it  completes  the  value-unlocking  listing  of  its  Sports Toto Malaysia Trust (STM Trust).

Earnings  dilution  partially  offset  by  front-loaded  dividends.  BToto's earnings are expected  to  slip  by  18.6%  after  selling  off  its  20.5%  stake  in  STM  Trust  as  part  of  a proposed  listing  exercise.  However,  we  note  that  the  entire  corporate  proposal  is expected to unlock RM1.1bn in cash proceeds for BToto, thus providing ample scope for the  group  to  raise  its  ROEs  via  a  more  proactive  front-loaded  capital  management exercise that would entail a combination of special dividends and a near-100% recurring
dividend  payout  vs  our  current  assumption  of  a  87%  recurring  payout.  Concerns  of  a holding company discount may be mitigated by the fact that units in the STM Trust could eventually be distributed back to BToto shareholders. 

Maintain BUY, keeping FV. We are maintaining our BUY recommendation and the FV of RM5.01. We assume that there is a high likelihood of BToto distributing a meaningful sum  as  a  special  dividend  upon  the  completion  of  the  proposed  corporate  exercise, while the small-ticket nature of its gaming business provides a certain degree of demand and hence, assures revenue resilience even in times of economic uncertainty.

 Source: OSK