Period

3Q16/9M16

Actual vs. Expectations

3Q16 was yet another disappointing quarter with 9M16 net profit of RM201.5m making up only 59%/64% of house/street’s FY16 estimates. This was due to: (i) higher estimated prize payout ratio (EPPR) of 62.5% vs. our FY16 assumption of 61%, (ii) lower ticket sales of RM20.0m/draw vs. assumption of RM20.6m/draw, and (iii) higher effective tax rate of 32% vs. assumption of 28%.

Dividends

A 4.0 sen 3nd interim NDPS (ex-date: 11/04/16; payment date: 28/04/16) was declared in 3Q16, totalling YTD NDPS to 14.0 sen which was lower than the 16.5 sen paid in 9M15.

Key highlights

3Q16 net profit declined 17% QoQ to RM58.4m, the lowest quarterly profit in more than a decade since 4Q04, no thanks to poor luck factor coupled with continued weak ticket sales. Despite having one extra draw at 46 draws, 3Q16 ticket sales fell 10% to RM896.4m as average ticket sales per draw dipped 5% to RM19.5m from RM20.8m. This contributed to 8% decline in group revenue to RM1.32b in 3Q16. EPPR was 63.5% from 61.7%, which resulted in the group's NFO operating profit contracted 17% to RM103.5m. Meanwhile, HR Owen (HRO) reported operating loss of RM3.4m from operating profit of RM4.5m due to the drop in new car sales volume.

YoY, 3Q16 net income plunged by 44% from RM104.6m in 3Q15, although revenue remained flattish, which was due to the below theoretical EPPR in 3Q15 at 59.2% as well as no GST charge back then whereas it is now absorbed as part of the cost. In addition, HRO was previously profitable in 3Q15. Likewise, 9M16 net profit declined 29% to RM201.5m despite revenue rising 7%. This was mainly attributed to higher EPPR of 62.5% vs. 58.8% in 9M15. The rise in revenue was mainly led by HRO sales, although earnings were flat.

Outlook

We are now expecting NFO to decline 1.45% in FY16 from earlier growth estimate of 1.1% but to maintain at 2%-3% from FY17 onwards. 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. On the other hand, the Vietnam venture which is to kickstart in mid-2016 is likely to have less meaningful impact to the group given its small effective equity stake of only 10.2%.

Change to Forecasts

We trim our FY16/FY17 estimates by 13%/4% as we lowered FY16 ticket sales growth to -2% from +1% previously while EPPR assumption is raised to 62.5% from 61% for FY16 but maintained at 60% for FY17. Consequently, NDPS estimates are also trimmed proportionately based on unchanged 90% payout.

Rating

Downgrade to MARKET PERFORM from OUTPERFORM

Valuation

Post earnings revision, price target is now lowered to RM3.42/DCF share from RM3.56/DCF share.

We see little upside since the recent strong run-up in share price which rose 12.5% YTD.

However, the new MARKET PERFORM is premised on its still attractive net yield of 6%-7%.

Risks

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

Source: Kenanga Research - 21 Mar 2016