We are downgrading BJTOTO back to an UNDERPERFORM from OUTPERFORM after its share price rebounded swiftly  to its preselldown levels. The listing of STM-Trust is expected to be in Aug, which may draw interest for the expected 49 sen/share special dividend. However, we maintain our negative view on the Business Trust listing, which would de-rate the stock’s current premium valuation in addition to it having to endure a 20%  dilution in earnings and dividend payout. Our DCF-derived price target of RM4.02/share is maintained. 

Share price back to normal.  On 24 Jun, Berjaya Sports Toto Bhd (“BJTOTO”, UP, TP: RM4.02) was one of six counters that hit ‘limit-down’ during the pre-close session, resulting in its share price tumbling down by RM1.01 or 24% to RM3.20. The unexpected selldown was due to programme selling for the FTSE rebalancing. The share price rebounded swiftly the next trading day, hitting ‘limit-up’ or back to pre sell-down levels.

Ticket sales lagging behind Magnum. In the recent results season, the earnings reports showed that for the first time in  three years,  Multipurpose Holdings Bhd’s (“MPHB”, OP; TP: RM4.37) Magnum have overtaken BJTOTO in 1QCY13 NFO ticket sales. Magnum’s total ticket sales jumped 14.5% to RM920.6m from RM804.0m in the three months while BJTOTO’s sales rose slightly by 2.2% to RM905.6m from RM885.8m previously. However, we notice that the ticket sales of BJTOTO are more consistent as compared to that of Magnum. (please refer to chart in Pg 2)  …but not a real problem.  We believe that the consistent ticket sales trend at BJTOTO is mainly due to it having seven games (4D, 4D Jackpot and five other lotto games) where buying interest (especially during the accumulation of high jackpot prizes) is likely to be well spread among the games whereas Magnum’s ticket sales will accelerate only when the prize jackpot balloons for its 4D jackpot as it only has two games (4D and 4D Jackpot). This also shows why the prize payout ratio for BJTOTO is more consistent as compared to that of Magnum.

BJTOTO always traded at a premium. In the past five years, BJTOTO has traded at an average premium PER of 15.0x as opposed to the 10.5x for MPHB, likely due to the fact that it is a pure NFO player while MPHB is an investment holding company with interest in NFO, property, hotel, insurance and stockbroking. However, MPHB’s prospective PER has improved significantly to 13.8x on average since the announcement of its demerger exercise in May-12 although this is still at a discount to that of BJTOTO. Before May-12, MPHB was trading at an average 9.4x  forward PER only. (Please refer to chart in Pg 2)

…but this may not be the case going forward.  We believe that the premium valuation that BJTOTO has enjoyed previously will narrow for two reasons: 1) the listing of STM-Trust will reduce the attractiveness of BJTOTO where investor may buy the Business Trust directly to enjoy the full benefit of owning the NFO cash flow and 2) after the completion of MPHB’s decoupling exercise, BJTOTO is no longer be the only proxy for NFO play. In fact, MPHB’s valuation is now more attractive than that of BJTOTO in terms of earnings multiples and yields. 

UNDERPERFORM at RM4.02/share. While we like its product offerings, we remain cautious about the separate listing of STM-Trust in SGX-ST, which will de-rate its valuations. Its earnings and dividend payout will also be diluted immediately by c.20%. In view that the share price is ahead of our unchanged DCF-derived price target of RM4.02/share, we are downgrading BJTOTO back to an UNDERPERFORM. SWITCH to MPHB.

Source: Kenanga