3Q18 headline came below expectations largely due to higher taxation but operationally, BJTOTO registered stable ticket sales while luck factor was in its favour. This could mean that earnings could have bottomed out. At CY18 PER of 10x, it looks very attractive. In addition, the stock also offers attractive yields of 7-8%. We retain our OUTPERFORM call with a revised target price of RM2.65.

3Q18 below expectation. 3Q18 net profit of RM59.2m, which came below our expectation, tallying 9M18 earnings to RM195.3m, accounted for 67%/71% of house/street’s FY18 full-year estimates. This was mainly persistently high effective tax rate at 38% in 3Q18 and 35% in 9M18 against our FY18 assumption of 30%. Operationally, ticket sales and luck factor were fairly in line. It declared 3rd interim NDPS of 4.0 sen (ex-date: 11 Apr; payment date: 03 May) in 3Q18 vs. 4.0 sen and 3.0 sen paid in 2Q18 and 3Q17, respectively. This brings 9M18 NDPS to 12.0 sen against 11.0 sen paid in 9M17.

Operationally steady. Although net profit dipped 4% sequentially to RM59.2m, 3Q18 revenue inched up 1% to RM1.40b mainly led by higher HR Owen (HRO) car sales. The decline in bottom-line was largely due to higher taxation as mentioned above. Operationally, NFO sales dipped 1% to RM895.0m given the stronger sales in 2Q18 due to the highest ever jackpot in the Grand 6/63 games. In fact, average ticket sales per draw fell 5% to RM19.0m from RM20.0m with draws conducted in 3Q18 increased to 47 from 45 times previously. Meanwhile, estimated prize payout ratio (EPPR) upped slightly to 62.6% from 62.2%. Associate incomes turned to losses of RM0.9m from profit of RM0.4m previously.

Better earnings than last year. Both 3Q18 and 9M18 reported net profits rose 24% and 16% from RM47.9m and RM168.8m last year, respectively. This was largely due to better luck factor with EPPR improving to 62.6% and 62.3% from 64.5% and 63.4% previously. However, ticket sales fell slightly by 3% and 1% to RM895.0m and RM2.64b, respectively. On the flipside, HRO reported improved results on higher car sales as mentioned above. Meanwhile, share of profit/loss from associates remained weak as it was loss-making at RM0.9m and RM2.3m previously.

Luck factor and ticket sales remain keys to earnings. Although ticket sales fell slightly in 3Q18, we are not worried as the sales momentum was good. In fact, similar to its peer MAGNUM (MP; TP: RM2.20), BJTOTO managed to register improved luck factor and ticket sales in the past year which is a good sign. However, we cut FY18/FY19 estimates by 7%/10% largely on the higher effective tax assumptions of 35%/35% from 30%/28% previously while other key assumptions remain unchanged. Accordingly, NDPS are also cut proportionately based on the 80% payout.

Reiterate OUTPERFORM. Share prices of BJTOTO fell c.6% YTD, against FBMKLCI’s +c.3%, especially since February as market sentiment turned cautious. However, with improving ticket sales and better luck factor, 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 RM2.65/DCF share from RM2.70/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 Mar 2018