Period  2Q15/1H15

Actual vs. Expectations At 47%/48% of house/street’s FY15 full-year estimates, 1H15 net profit of RM178.0m came in within expectations.

Dividends  A 6.0 sen 2nd interim NDPS was declared in 2Q15 (ex date: 28 Jan 2015, payment date: 13 Feb 2015), bringing 1H15 NDPS to 11.5 sen, implying payout ratio of 87.0%.

Key highlights  2Q15 net income leapt 27% QoQ to RM99.7m from RM78.3m while top-line inched up by 1%. The stronger growth in bottom-line as opposed to topline was due to better luck factor with estimated prize payout ratio (EPPR) of 57.3% vs. 59.9% previously. Meanwhile, revenue for NFO segment grew 5% on the back of higher ticket of RM898.4m from RM857.4m due to higher draw day of 45 conducted in 2Q15 from 42 draws previously. However, average ticket sales per draw continued to trend downward to RM20.0m from RM20.4m in 1Q15. On the other hand, the higher NFO revenue was mitigated by lower revenue of 5% reported by HRO due to forex differences while sales volume was fairly flattish.

 YoY, 2Q15 net profit jumped 21% on the back of 45% surge in revenue while 1H15 net earnings dipped 2% despite turnover soaring 42% over the period. The significant improvement in top-line was mainly driven by the consolidation of HRO results in 3Q14. The improved 2Q15 results were led by better EPPR of 57.3% from 59.7% while the decline in 1H15 earnings were attributable to higher interest expenses arising from the HRO acquisition.

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 No changes to our FY15-FY16 estimates.

Rating Maintain OUTPERFORM

Valuation  BJTOTO has underperformed the FBMKLCI this year where its share price has contracted 12.1% YTD vs. the 30-stock index decline of 8.9%.

 Given its defensive earnings quality and attractive yield of 7%, income seeking investor would continue to hold the stock.

 Our price target is maintained at RM4.25/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