Period  2Q14/1H14

Actual vs. Expectations At 45% of our full-year FY14 estimate and 43% of market consensus, the RM181.4m 1H14 net profit came in below expectations.

 The weaker than expected 1H14 results were due to (i) lower average ticket sales of RM21.2m/draw in 1H14 vs. our assumption of RM22.4m/draw; and (ii) higher effective tax rate (ETR) of 31.6% in 1H14 vs. our assumption of 28.0%.

Dividends  A 6.0 sen 2nd interim NDPS was declared in 2Q14, totalling YTD NDPS to 10.0 sen implying a 73.5% payout ratio. The 6.0 sen NDPS is payable on 28 Jan-14 with entitlement date of 13 Jan-14.

Key highlights  The 2Q14 net profit of RM82.6m contracted 14% sequentially from RM98.8m in 1Q14 on the back of 2% dip in revenue. The weaker set of results was mainly due to (i) corporate exercise expenses, estimated at c.RM5m, for the already aborted STM listing; and (ii) the normalisation of luck factor after a good run in 1Q14. The 2Q14 estimated prize payout ratio (EPPR) rose to 59.7% from 57.7%. 2Q14’s average ticket sales per draw inched up slightly to RM21.3m from RM21.2m in 1Q14, driving the 2Q14 ticket sales up slightly to RM935.6m from RM933.0m. Number of draws were the same at 44.

 On a YoY comparison, the 2Q14 net profit declined 27% while revenue slid 5% over the year. This was mainly due to the same reason as the QoQ comparison where besides the STM listing expenses, ticket sales were weaker as there was 44 draws conducted in 2Q14 vs. 45 with luck factor being more favourable in 2Q13 at 57.5%. Average ticket sales declined from RM21.7m/draw in 2Q13. YTD, 1H14 net profit declined 19% to RM181.4m from RM223.3m while revenue dipped 3% YoY. Average ticket sales dropped to RM21.2m in 1H14 from RM21.9m in 1H13 with draw days lesser by 1 day to 88 vs. 89. 1H14 EPPR was fairly flat at 58.7% vs. 58.4% last year.

Outlook  The forward NFO ticket sales remain resilient with c.3% annual growth. Unlike MAGNUM which faces a volatile luck factor, BJTOTO’s prize payout ratio is less volatile over the quarters given its wider spread of lotto games and 4D games.

Change to Forecasts FY14 estimate cut by 5.2% due to change in assumptions of (i) average ticket sales per draw to RM21.9m from RM22.4m; and (ii) ETR to 30% from 28%; FY15-FY16 EPS cut by 2.6% after a low-base effect of FY14 average ticket sales with 3% annual growth unchanged. ETR maintain at 28%.

Rating Maintain OUTPERFORM

Valuation  Post earnings revision, new price target is now at RM4.30/DCF from RM4.42/DCF share.

Risks to Our Call (i) Lower than expected ticket sales

 (ii) Higher than expected EPPR.

Source: Kenanga