4Q17 matched our expectations. BJTOTO reported 4Q17 earnings that leapt 51% QoQ to RM72.5m totalling FY17 net profit to RM241.3m which came 2% above our forecast but fell short of consensus estimates by 11%. A final NDPS of 3.0 sen (ex-date: 18 Jul; payment date: 09 Aug) was declared in 4Q17, vs. 3.0 sen and 5.0 sen paid in 3Q17 and 4Q16, respectively, bringing FY17 NDSP to 14.0 sen in contrast to 19.0 sen paid in FY16.

However, NFO still weak sequentially. Despite earnings surging 51%, the core business NFO still posted a 3% decline in operating profit in 4Q17 as ticket sales fell 4%. In fact, estimated prize payout ratio (EPPR) was about the same at 64.3% from 64.5%. The only positive note was the average ticket sales per draw improved to RM20.2m from RM19.7m in the CNY-quarter of 3Q17. The drop in total ticket sales was mainly due to 44 draws in 4Q17 from 47 draws previously. On the other hand, the strong earnings in 4Q17 were mainly led by: (i) HR Owen (HRO) as earnings improved to RM8.4m from RM1.2m on higher car sales volume, (ii) share of associate profit of RM7.0m from loss of RM0.4m, and (iii) lower taxation by 28% to RM26.3m from RM36.7m.

Both ticket sales and luck factor declined from last year. The 4Q17 and FY17 net profits declined 31% and 21% from RM104.7m and RM306.2m, respectively. Again, this was due to declining ticket sales coupled with poorer luck factor. However, group revenue was flattish in 4Q17 and rose 3% in FY17 largely led by higher HRO car sales. NFO reported ticket sales, which fell 3% YoY in 4Q17 primarily due to average ticket sales per draw dipping 1% from RM20.4m while 4Q16 had two extra draws at 45 draws. Besides, 4Q16 also had a better than the theoretical luck factor at 58.2%. Meanwhile, it had the same 179 draw days in FY17, and the 2% contraction in ticket sales was in tandem with 2% slide in average ticket sales per draw of RM19.8m from RM20.1m previously. FY17 EPPR was 63.6% vs. 61.4% in FY16.

Concerns of luck factor and ticket sales to remain. Like its peer MAGNUM (MP; TP: RM2.17), BJTOTO also faced the same problem of volatile luck factor and lacklustre ticket sales in the past four years which raised concerns of earnings sustainability to support dividend pay-out. Post-4Q17 results release, to reflect the latest balance sheet coupled with the upcoming MTN program to refinance its existing loan, we trimmed FY18 earnings estimates by 3.5%. We also introduced new FY19 forecast in which earnings are set to grow only 2% on the back of 1% ticket sales growth with EPPR of 61%.

Upgrade to OUTPERFORM. Post-earnings revision, our new target price is reduced further to RM2.95/DCF share from RM3.09/DCF share previously as we cut growth factor to 1% from 1.5% in view of the persistent weak ticket sales. However, we upgrade the stock to OUTPERFORM from MARKET PERFORM as value has re-emerged following the stock being bashed down last month on fears that it may face the same fate of MAGNUM, which was slammed with a RM476m tax penalty claim by IRB. BJTOTO is now trading at CY18 PER of 10.6x, a level last seen almost two decades ago. As such, we believe the sell-down is overdone. Downside risks to our upgraded call include persistent declining ticket sales and higher-than-expected EPPR.

Source: Kenanga Research - 21 Jun 2017