Period  3Q15/9M15

Actual vs. Expectations  3Q15 results came within expectations with 9M15 net profit of RM282.6m making up 75%/78% of house/street’s full-year estimates.

Dividends  A 5.0 sen 3rd interim NDPS was declared in 3Q15 (ex date: 06 Apr 2015, payment date: 28 Apr 2015), totalling 9M15 NDPS to 16.5 sen, implying payout ratio of 78.6%.

Key highlights  3Q15 net profit rose 5% QoQ to RM104.6m on the back of 6% hike in topline. Although it posted improved results, this was mainly helped by investment-related income, which almost surged 4- fold to RM23.0m from RM6.0m. In fact, at operating profit level, it reported a 5% decline in EBIT, which was mainly due to poorer luck factor of 59.2% from 57.3% that caused its NFO unit posting a 6% drop in operating profit to RM149.1m. The rise in topline was helped by a 5% rise in NFO ticket sales on higher number of draw days of 46 vs. 45 while average ticket sales per draw also inched up 2%. In addition, HR Owen (HRO) also reported better earnings due to higher auto car sales volume.

 YoY, 3Q15 net income surged 43% while revenue rose 8%, attributable to: (i) higher interest expense in 3Q14 as Berjaya Philippines Inc (BPI) geared up with borrowings to acquire HR Owen, (ii) higher investment related income as stated above, (iii) lower effective tax rate of 30% vs. 39%, and (iv) better HRO earnings on higher auto sales volume. However, this was mitigated by weaker NFO earnings as: (i) weaker luck factor of 59.2% vs. 58.5%, and (ii) lower average ticket sales per draw by 4% as 3Q14 had the CNY effect.

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 and 4D games.

Change to Forecasts  No changes to our FY15-FY16 estimates. At the same time, we extended our forecast horizon to FY17 which we expect earnings to grow 3.9%. This is on the back of: (i) 60% prize payout ratio, (ii) NFO growth of 3%, and (iii) 179 draw days.  Our forecast assumption is without taking into consideration the GST effect. Assuming the NFO is to bear 100% of the 6% tax while there is no change to its prize payout ratio, we see 6%-7% downside risk to our forecasts.

Rating Maintain OUTPERFORM

Valuation  Our price target is maintained at RM4.25/DCF share.

Risks to Our Call  (i) Lower-than-expected ticket sales, (ii) Higherthan- expected EPPR, and (iii) Unexpected losses at BPI/HRO

Source: Kenanga