Period

1Q16

Actual vs. Expectations

1Q16 results came broadly within expectations with net profit of RM72.5m making up 20%/21% of house /street’s FY16 full-year estimates. This was due to weaker-than-expected estimated prize payout ratio (EPPR) of 62.4% vs. our FY16 assumption of 60%.

Dividends

A 2.5 sen 1st interim cash NDPS (ex-date: 08/10/15; payment date: 23/10/15) and a 1-for-140 share dividend which is equivalent to 2.5 sen (ex-date: 08/10/15), totalling 5.0 sen were declared in 1Q16, vs. 5.5 sen and 5.0 sen paid in 1Q15 and 4Q15 respectively.

Key highlights

1Q16 net profit dropped 7% QoQ to RM72.5m from RM77.5m as revenue contracted 8% over the quarter. The decline in earnings was not unexpected given the seasonally strong CNY 4Q15 previously which resulted in 1Q16 NFO ticket sales falling 10% to RM851.8m. This was in addition to the full absorption of 6% GST in 1Q16 and fewer draw days of 43 vs. 45 in 4Q15. This brought average ticket sales per draw to RM19.8m from RM21.1m. Luck factor was lower slightly to 62.4% from 62.0% previously. Meanwhile, HR Owen (HRO) reported EBIT dipping 13% as revenue fell 10% over the period despite strong GBP against MYR.

YoY, 1Q16 net earnings declined 7% from RM78.3m in 1Q15, despite revenue rising 8% over the year, primarily due to weaker luck factor of 62.4% vs. 59.9% in 1Q15. 1Q16 ticket sales dipped slightly by 1% from RM857.4m, despite having one extra draw at 43 draws vs. 42 draws in 1Q15, due to the full absorption of 6% GST. Thus, average ticket sales per draw fell 3% to RM19.8m from RM20.4m previously. On the other hand, HRO posted higher earnings by 64% to RM13.0m from RM7.9m as revenue rose 20% thanks to new car sales volume as well as favourable GBP against MYR.

Outlook

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

However, the implementation of GST will add cost to the operator as it needs to absorb the 6% tax which will crimps its bottomline.

Change to Forecasts

Despite weaker set of 1Q16, we keep our FY16-FY17 estimates unchanged as the only swing factor is due to luck factor. We prefer to wait-and-see at upcoming luck factors before making any new assumption.

Rating

Maintain OUTPERFORM

Valuation

Our target price is maintained at RM3.72/DCF share.

It offers an attractive dividend yield of 7%-8%

Risks to Our Call

(i) Lower-than-expected ticket sales, (ii) Higher-thanexpected EPPR, and (iii) Unexpected losses at BPI/HRO

Source: Kenanga Research - 18 Sep 2015