Although 2Q18 came below expectations, BJTOTO still reported higher YoY ticket sales with better luck factor, which is a positive sign. Selling pressure on share price has also abated, implying it could have bottomed out. Besides, it also offers attractive yields of 7%-8%. At CY18 PER of 10x, it looks very attractive. We maintain OUTPERFORM call with lower price target of RM2.70/DCF share.

2Q18 below expectation. BJTOTO released 2Q18 net profit of RM61.7m, which came below our expectation, bringing 1H18 earnings to RM136.0m accounted for 42%/48% of house/street’s FY18 full year estimates. The was owing to (i) higher prize payout ratio (EPPR) of 62.2% in 1H18 against our FY18 assumption of 61%, and (ii) higher effective tax rate of 34% in 1H18 vs. our FY18 assumption of 28%. It declared 2nd interim NDPS of 4.0 sen (ex-date: 24 Jan 2018; payment date: 13 Feb 2018) in 2Q18 which was the same as 1Q18 and 2Q17, bringing the total of 1H18 NDPS to 8.0 sen matching 1H17’s NDPS.

Sequential result dragged by HRO losses. Despite stronger NFO ticket sales, 2Q18 net profit fell 17% QoQ to RM61.7m mainly due to HR Owen’s (HRO) losses of RM1.3m at operating level from EBIT of RM19.7m previously due to decline in car sales coupled with lower profit margins for certain new car sales. In fact, 2Q18 ticket sales rose 6% to RM900.8m due to higher draw days of 45 from 42. However, average ticket sales per draw fell slightly by 1% to RM20.0m. EPPR raised slightly to 62.2% from 62.1%. Meanwhile, share of associate earnings swung back to a small profit of RM0.4m from RM1.8m loss previously.

Better ticket sales and luck than last year. The NFO operation reported improvement for both ticket sales and luck factor in 2Q18 and 1H18 as operating profit jumped by 17% and 6% to RM115m and RM224.7m respectively. Ticket sales rose 4% in 2Q18 as average ticket sale per draw also grew 4% while ticket sales inched up 1% in 1H18 as average ticket sales per draw improved by 2%. 2Q18 EPPR improved from 63.6% while EPPR was lower at 62.2% in 1H18 from 62.8% last year. However, 2Q18 net profit dipped 1% from RM62.1m due to the losses at HRO mentioned above while 1H18 net income leapt 13% to RM136.0m led by better luck factor coupled with lower investment expenses of RM0.7m compared to RM8.6m previously.

Luck factor and ticket sales remain keys to earnings. While the luck factor and ticket sales remain the deciding factor, both BJTOTO and its peer MAGNUM (MP; TP: RM2.17) managed to register improved luck factor and ticket sales in the past 3-4 quarters; a good sign. As such, we believe the downtrend should have bottomed. In all, we have reduced our FY18/FY19 estimates by 10%/6% on the back of raising our EPPR assumption to 62% from 61% previously while effective tax rate assumption is increased to 30% in FY18 from 28% previously. As such, NDPS are also proportionately cut based on the 80% payout.

OUTPERFORM maintained. Share price of BJTOTO has been fairly stable in the past three quarters. Together with improved luck factor and stabilised ticket sales, we believe its share price should have bottomed. Even with earnings cut, the stock still trades at a very attractive level of 10x CY18 PER. Thus, we keep our OUTPERFORM call with price target lowered to RM2.70/DCF share from RM2.95/DCF share previously. Downside risks to our call include (i) persistent decline in ticket sales and (ii) higher-than-expected EPPR.

Source: Kenanga Research - 19 Dec 2017