After a strong turnaround in prize pay-out in 4Q16, BJTOTO reported another disappointing 1Q17 with earnings plunging 44% sequentially due to a 4-ppt hike in luck factor while the preceding quarter was a seasonally strong CNY quarter. While 1Q17 was a slow start, we believe the luck factor is still manageable given its well-spread lotto and 4D games. We maintain our MARKET PERFORM for its sustainable attractive yield of 6-7% with revised price target of RM3.35/DCF share.

1Q17 below. BJTOTO reported a disappointing 1Q17 which saw net profit of RM58.7m making up only 16%/18% of house/street’s FY17 estimates. This was primarily due to: (i) a poorer luck factor with prize pay-out ratio (EPPR) coming above our assumption of 60% at 62.0%, and (ii) higher effective tax rate (ETR) of 36.3% vs. our assumption of 28%, due to certain expenses disallowed for taxation purposes while some investment holding companies incurred losses that were insufficient to offset the taxation. Meanwhile, it declared 1st interim NDPS of 4.0 sen (ex-date: 05 Oct; payment date: 18 Oct) in 1Q17 which was lower than the 5.0 sen paid in both 4Q16 and 1Q16.

Luck was not good sequentially. 1Q17 net profit plunged 44% QoQ to RM58.7m from RM104.7m with top line falling 3% over the quarter. This was mainly attributed to the luck factor mentioned above as EPPR rose to 62.0% from 58.2% 4Q16 while ETR jumped to 36.3% from 23.4% previously. The fall in revenue was led by lower NFO ticket sales by 5% as 4Q16 was a seasonally strong CNY quarter while 1Q17 held lower draw days of 43 vs. 45. 1Q16 average ticket sales slid to RM20.2m per draw from RM20.4m previously. Meanwhile, HR Owen (HRO) posted flattish revenue with a meagre increment of <RM3m which contributed to a higher operating profit of RM9.5m from RM6.9m in 4Q16.

Results also affected by forex. On a YoY comparison, 1Q17 net profit fell 19% from RM72.5m despite revenue rising 7%. This was attributable to a 27% contraction in HRO’s operating profit to RM9.5m from RM13.0m on higher opex while investment and other segment posted losses, which widened to RM20.1m from RM1.9m due to forex effect. However, the NFO segment posted improved results due to higher ticket sales by 2% on higher jackpot in the 4D jackpot games with slightly improvement in EPPR from 62.4% to 62.0%. Average ticket sales improved 2% from RM19.8m per draw last year to RM20.2m.

Luck factor is still the key earnings determining factor. After a strong turnaround in EPPR in 4Q16, lady luck deserted BJTOTO again in 1Q17, which may raise concern of persistently high pay-out in the future. However, unlike MAGNUM (OP; TP: RM2.78) which faces volatile luck factor, BJTOTO’s EPPR is considerately less volatile over the quarters given its wider spread of lotto and 4D games. On the other hand, the Vietnam venture which kick-started in July is likely to have a less meaningful impact to the group given its small effective equity stake of only 10.2%. In all, while keeping FY18 estimates unchanged, we trimmed FY17E EPS by 7% as we raised EPPR assumption to 61% from 60% on the weak 1Q17 results.

Maintain MARKET PERFORM. Post-earnings revision, our new price target is reduced to RM3.35/DCF share from RM3.40/DCF share previously. Although upside potential is limited, we maintain our MARKET PERFORM rating for its attractive yield. We believe income seeking investors may find value in this yielding stock, which offers sustainable 6-7% net yield.

Downside risks to our call include: (i) lower-than-expected ticket sales, (ii) higher-than-expected EPPR, and (iii) unexpected losses at BPI/HRO.

Source: Kenanga Research - 20 Sep 2016