BJTOTO reported yet another disappointing result for the 3rd straight quarter in 3Q17 as luck factor remained vulnerable while a CNY quarter ticket sales were not strong enough to create recovery traction. We cut FY17- FY18 estimates by 21%/1% to reflect this weak set of results. It remains MARKET PERFORM for its attractive yield of 5%-6% with a revised target of RM3.09/DCF share. 3Q17 below expectations. At 56%/55% of house/street’s FY17 estimates, 9M17 net profit of RM168.8m still missed expectations, which were largely due to: (i) RM15.6m additional GST adjustment, (ii) poor luck factor coupled with (iii) higher-than-expected effective tax rate. Estimated prize pay-out ratio (EPPR) raised further to 64.5% in 3Q17 from the already high 63.6% in 2Q17, raising 9M17 EPPR to 63.4% vs. our FY17 assumption of 62% while 9M17 effective tax rate was 37% vs. our FY17 assumption of 28%. A 3rd interim NDPS of 3.0 sen (ex-date: 11 Apr; payment date: 28 Apr) was declared in 3Q17, vs. 4.0 sen both paid in 2Q17 and 3Q16, totalling 9M17 NDPS to 11.0 sen vs. 14.0 sen paid in 9M16.

Still hit by luck factor albeit better CNY-led ticket sales. 3Q17 net profit fell 23% sequentially to RM47.9m largely due to the abovementioned GST adjustment, unfavourable luck factor and higher taxation. Despite the poor luck factor, 3Q17 ticket sales rose 7% to RM852.6m owing to the CNY effect and extra two draw days to 47 draws from 45 draws previously. Average ticket sales per draw improved 3% to RM19.7m in 3Q17 from RM19.2m. At group’s level, 3Q17 revenue fell 6% to RM1.37b largely attributable to 16% decline in car sales at HR Owen (HRO) while the investment and others segment normalised to RM20.1m from RM73.7m previously.

Weak ticket sales and vulnerable luck factor were key issues against yearly results. The 3Q17 and 9M17 net profits contracted 18% and 16% from RM58.4m and RM201.5m, respectively, mainly led by the lacklustre ticket sales coupled with still high EPPR. 3Q17 revenue was 5% YoY higher largely due to higher HRO sales while 3Q17 was a CNY quarter, but 3Q16 was not. With one extra draw, 3Q17 ticket sales per draw only inched up 1% from RM19.5m to RM19.7m. However, EPPR in 3Q16 was lower at 63.5%. YTD, despite having one extra draw day of 135 vs. 134, 9M17 ticket sales dipped 1% to RM2.66b from RM2.69b as average ticket sales per draw fell 2% to RM19.7m from RM20.0m last year. EPPR was also higher at 63.4% from 62.5% previously.

Luck factor and ticket sales are the main concerns. Like its peer MAGNUM (MP; TP: RM2.30), BJTOTO also faced the same problem of volatile luck factor and lacklustre 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 9M17 results, we cut FY17 estimates and NDPS by 22% on: (i) EPPR up to 63.5% from 62%, and (ii) effective tax rate to 35% from 25%. FY18 forecast is being trimmed by 1% on cash flow adjustment from new FY17 estimates while key assumptions remained unchanged.

Maintain MARKET PERFORM. Post-earnings revision, our new price target is reduced to RM3.09/DCF share from RM3.17/DCF share previously. It remains as MARKET PERFORM rating for its attractive yield. We believe income seeking investors may find value in this yielding stock at 5-6% 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 - 17 Mar 2017