4Q16 earnings rebounded strongly, by 78% QoQ/35% YoY, helped by favourable luck factor which came below the theoretical level for the first time in four quarters. Nonetheless, overall FY16 results came within our expectations. With this strong set of quarterly results, we believe interest on this stock will return after its share price has fallen 15% in the past three months with valuation at multiple-year lows. We upgrade the stock to OUTPERFORM with revised price target of RM3.40/DCF share.

4Q16 in line. BJTOTO reported a strong set of 4Q16 earnings, which surged 78% QoQ, bringing FY16 net income to RM306.2m which beat our/street’s forecasts by 4%/6%. The sharp rebound in 4Q16 was largely attributed to the below 60% theoretical prize pay-out (EPPR) of 58.2% against 63.5% previously. It declared a 5.0 sen 4th interim NDPS (ex-date: 18/07/16; payment date: 09/08/16), totalling FY16 NDSP to 19.0 sen, implying 83.4% pay-out against our assumption of 19.6 sen and a total of 21.5 sen paid in FY15.

Good luck factor sequentially. 4Q16 net profit leapt 79% QoQ to RM104.7m from RM58.4m previously due largely to the abovementioned luck factor. In addition, the results were also partly helped by seasonality on CNY factor which saw its average ticket sales per draw rose 4% to RM20.4m from RM19.5m despite having 45 draws as opposed to 46 draws in the preceding quarter. The seasonality helped to push total ticket sales by 2% to RM916.1m from RM896.4m. On the other hand, HR Owen (HRO) turned to operating profit of RM6.9m from operating loss of RM3.4m in 3Q16, mainly driven by higher sales by 37% from additional outlets.

Better luck factor than last year too. Likewise, 4Q16 net earnings also rebounded 35% from RM77.5m in 4Q15 as EPPR was 62.0% back then. However, ticket sales slid 3% from RM949.2m as average ticket sales per draw fell 3% from RM21.1m while total draw days was maintained at 45. Meanwhile, HRO reported lower EBIT by 49% due to higher opex. YTD, FY16 net profit declined 15% to RM306.2m from RM360.2m despite revenue rising 6% which was led by higher HRO sales. The drop in bottom line was largely due to poorer luck factor with EPPR rising to 61.4% from 59.6%, coupled with decline in ticket sales by 1%.

Luck factor is still the key determining factor to bottom line, although prize pay-out ratio had improved in 4Q16. However, unlike MAGNUM (OP; TP: RM2.80) 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 kick-start in mid-2016 is likely to have less meaningful impact to the group given its small effective equity stake of only 10.2%. In all, while keeping FY17 estimates unchanged, we introduce our FY18 estimates which earnings are expected to grow 3% from FY17, based on 60% EPPR and 2% ticket sales growth assumptions. Our sensitivity studies show for every 1% hike in EPPR from 60%, FY17 EPS would be reduced by 7%.

Upgrade to OUTPERFORM. Share price has fallen 15% since our downgraded call three months ago to the current trough level of multiple-year lows of CY16 11.5x PER which is fairly attractive and also appears to be bottoming. Thus, we upgrade the stock to OUTPERFORM from MARKET PERFORM previously. It also offers attractive yields of >8%. Our new DCFdriven price target is now RM3.40/share from RM3.42/share as we roll over our valuation base year to FY17E with a higher WACC of 7.0%. Risks to our upgraded call include : (i) lower-than-expected ticket sales, (ii) higher-thanexpected EPPR, and (iii) unexpected losses at BPI/HRO.

Source: Kenanga Research - 21 Jun 2016