Period  3Q14/9M14

Actual vs. Expectations At 76% of our full-year FY14 estimate and 72% of market consensus, the 9M14 core net profit of RM288.2m came in within expectations.

 The headline 9M14 net profit of RM254.6m is inclusive of RM33.6m investment expenses, related to the corporate exercise expenses for: (i) the already aborted STM listing and (ii) the acquisition of UKbased H.R. Owen (HRO) by its Philippines unit, Berjaya Philippines Inc. (BPI).

Dividends  A 1-for-43 share dividend (ex-date: 14 April 2014, entitlement date: 16 Apr 2014) has been declared, implying a 9.5 sen NDPS or 2.4% yield (based on yesterday’s closing price). This brings 9M14 NDPS to 19.5 sen.

Key highlights  3Q14 core profit of RM83.3m contracted 18% QoQ, mainly attributable to increase in: (i) interest expenses by 26% as BPI took up loan to acquire HRO and, (ii) taxation by 22%. In addition, there was higher interest

& other incomes in 2Q14 of RM17.9m compared to only RM4.8m in 3Q14. For the core NFO business, ticket sales rose 2% on the back higher draw days of 45 vs. 44 while average ticket sales per draw dropped slightly to RM21.1m from RM21.3m previously. Estimated prize payout ratio (EPPR) declined to 58.5% from 59.7%, which was reflected in the NFO operating margin of 17.9% from 16.7%.

 On a YoY comparison, the 3Q14 core earnings dipped 3% from RM86.1m partly due to higher taxation. Total ticket sales declined slightly by 1% as average ticket per draw slid by 1% from RM21.2m. EPPR was fairly flattish from 58.9% previously. YTD, 9M14 core income fell 4% mainly due higher taxation. Average ticket sales per draw dipped slight to RM21.2m from RM21.7m while EPPR increased slightly to 58.6% from 58.5%.

Outlook  The forward NFO ticket sales remain resilient with c.3% annual growth. Unlike MAGNUM which faces 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 We have incorporated HRO earnings into our earnings forecasts from 2H14 onwards with higher finance costs. As such, earnings impact to our estimates are very minimal at +0.3%, 0.0% and +0.3% for FY14- FY16, respectively.

Rating Maintain OUTPERFORM

Valuation  Our new price target also inched up slightly to RM4.31/DCF share from RM4.30/DCF share.

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

 (ii) Higher-than-expected EPPR.

 (iii) Unexpected losses at BPI/HRO

Source: Kenanga