While the 9M16 results were disappointing due to high taxation, 3Q16 earnings shown improvements with the normalisation of luck factor and a slight increase in ticket sales. With its share price down c.9% YTD, much more than the 3% drop in 9M16 ticket sales, we believe it still offers value especially with its above average yields. Although questions remain for its volatile luck factor and declining ticket sales trend, we keep our OUTPERFORM rating and revised the target price to RM2.52/DCF share.

9M16 still below forecasts. At 65%/71% of house/street’s FY16 estimates, 9M16 net profit of RM145.7m still came below our expectations owing to: (i) higher-than-expected taxation where 9M16 effective tax rate was 29% vs. our FY16 assumption of 24%, and (ii) lower-than-expected NFO sales growth. However, the results were within consensus estimates. A 3rd interim NDPS of 3.0 sen was declared in 3Q16 (ex-date: 8 Dec; payment date: 28 Dec), totalling 9M16 NDPS to 10.0 sen which is lower than the 12.5 sen paid in 9M15.

A better sequential result. 3Q16 net profit jumped 152% QoQ to RM55.0m thanks mainly to a normalised luck factor of 65.9% from extremely high pay-out of 73.0% in 2Q16. 3Q16 revenue rose 3% in tandem with ticket sales growth of 3% as there was one extra draw day to 45 from 44 previously. On a slightly positive note, average ticket sales per draw inched up slightly RM15.6m in 3Q16 from RM15.5m previously.

But YTD numbers still declined. YoY, 3Q16 earnings leapt 45% from RM38.0m owing primary to the recovery of luck factor from 69.9% in 3Q15 but ticket sales was on a downtrend which contracted 2% even though 3Q16 had one extra draw day as average ticket sales fell 4% from RM16.3m per draw. YTD, 9M16 net profit fell 23% to RM145.7m on the back of falling ticket sales of 3% and luck factor to 67.6% from 64.9% previously.

It is all about the luck factor. While the luck factor remains the deciding factor as the prize payout ratio is inconsistent from quarter to quarter, the implementation of GST will add to cost due to absorbing the 6% tax, which crimps bottom line. On the other hand, it managed to launch a new game, 4D Powerball Jackpot in end-Jan, which is a positive as it was introduced without replacing any existing games. However, the flipside is the prize pay-out ratio for jackpot is more vulnerable than 4D games.

OUTPERFORM unchanged. Post 3Q16 results, we trimmed FY16-FY17 estimates by 7% each as we: (i) raised effective tax rate assumption to 28% from 24%, and (ii) revised ticket sales growth to -2.0%/+2.0% from - 0.6%/+2.0%. But we keep our prize pay-out assumption unchanged at 67%/65% for FY16/FY17. Thus, our new price target is now reduced to RM2.52/DCF share from RM2.78/DCF share. However, we still keep our OUTPERFORM call as its valuation remains undemanding as well as for the attractive yields of 5%-6%. Risks to our call include: (i) higher-than-expected EPPR, (ii) weaker-thanexpected ticket sales, and (iii) rise in gaming tax.

Source: Kenanga Research - 25 Nov 2016