BJTOTO reported another disappointing set of results again for the second straight quarter in 2Q17 as luck factor remained vulnerable while the declining ticket sales trend has yet to find a bottom. We trimmed FY17-FY18 estimates by 10% to reflect this weak set of results. Even after we lowered pay-out ratio to 80% from 90% and the earnings revision, BJTOTO still offers attractive yield of 6%. MARKET PERFORM maintained at revised target of RM3.17/DCF share.

2Q17 below. Despite 2Q17 earnings rising 6% QoQ as some investment holding companies turned profitable, the 1H17 net profit of RM120.9m is still below expectations at 36%/38% of house/street’s FY17 estimates. The main variant between our estimate and the actual 1H17 results were owing to: (i) poorer luck factor with prize pay-out ratio (EPPR) coming above our assumption of 61% at 62.8%, and (ii) weaker average ticket sales of RM19.7m per draw vs. our assumption of RM20.5m per draw. It declared 2nd interim NDPS of 4.0 sen (ex-date: 05 Jan; payment date: 25 Jan) in 2Q17, totalling 1H17 NDPS to 8.0 sen as opposed to 10.0 sen paid in 1H16.

Better sequential results but… 2Q17 net profit rose 6% QoQ to RM62.1m mainly attributable to some investment holding companies turned profitable as reflected in its Investment & Others Segment with operating profit of RM6.0m from operating loss of RM20.1m in 1Q17. However, core business NFO reported ticket sales which dipped 1% despite having two extra draws at 45 with average ticket per draw falling 5% to RM19.2m from RM20.2m. EPPR also deteriorated to 63.6% from 62.0%, against the theoretical level of 60%. Meanwhile, earnings of HR Owen (HRO) contracted 17% as revenue declined 6% over the quarter, owing to weaker auto sales coupled with the weakening of GBP against MYR.

Luck factor remained vulnerable. YoY, 2Q17 and 1H17 net profit fell 12% and 16% from RM70.6m and RM143.1m, respectively, mainly due to lacklustre NFO operations where EPPR deteriorated to 63.6%/62.8% from 61.7%/62.0% while total ticket sales falling 8%/3% despite having same draw days of 45/88 for the both periods. Meanwhile, group revenue grew 2%/5% in 2Q17/1H17 due mainly to higher HRO turnover, which expanded 4%/11% owing to higher car sales volume but was offset by unfavourable forex.

Luck factor and ticket sales are the main concerns. Like its peer MAGNUM (OP; TP: RM2.52), BJTOTO also faced the same problem of volatile luck factor and declining ticket sales in the past three years which raised concerns of earnings sustainability to support dividend pay-out. Meanwhile, the new Vietnam venture which already 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, with this weak set of 1H17 results, we trimmed FY17/FY18 estimates by 10% as we revised ticket growth assumption to -1%/+1% from +2%/+2% and EPPR to 62%/61% from 61%/60%. We also lowered dividend pay-out ratio to 80% from 90%, thus cutting FY17E/FY18E NDPS by 20%.

Maintain MARKET PERFORM. Post-earnings revision, our new price target is reduced to RM3.17/DCF per share from RM3.35/DCF per 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 at 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 - 19 Dec 2016