2Q18 came slightly below expectations but is not alarming as it was due to higher taxation. In fact, revenue and PBT are well on track to meeting estimates with fairly stabilised ticket sales. Meanwhile, the impact of special draw cut is minimal at c.2% to the bottom-line while the reintroduction of SST is just a replacement for GST. We maintain our OUTPERFORM rating with a revised target price of RM2.25/DCF share.

2Q18 slightly below expectation. At 47%/48% of house/street’s FY18, 1H18 net profit of RM103.0m came slightly below our forecast but was within market consensus. The slightly weaker-than-expected results were primarily due to higher effective tax rate of 30.6% vs. our FY18 assumption of 28%. In fact, at top-line and PBT levels, the results were well within expectations at 50%/48% of FY18 estimates. It declared a 2nd interim NDPS of 3.0 sen (ex-date: 14 Sep; payment date: 28 Sep) in 2Q18, totalling 1H18 NDPS to 7.0 sen which is higher than 3.0 sen paid in 1H17.

Sequential results hit by post CNY-effect and less draws. 2Q18 net profit fell 13% QoQ to RM48.1m from RM54.9m on the back of 16% decline in revenue. This was largely due to less draws of 42 against 46 draws conducted in 1Q18 while average sales per draw fell 8% to RM15.5m after a CNY-quarter of RM16.8m in 1Q18. As such, NFO ticket sales contracted 16% to RM652.4m in 2Q18 from RM774.3m in the preceding quarter. Nonetheless, luck factor remained at normalised level with estimated prize payout ratio (EPPR) inching up slightly to 66.5% from 66.1%. Meanwhile, effective tax rate remained high at 31% from 30% previously.

Stabilised ticket sales trend. 2Q18 net profit declined 20% YoY from RM60.0m in 2Q17 while revenue slid 3% over the year. The contraction in earnings was attributable to lower than normalised EPPR of 63.0% in 2Q17 while the drop in revenue was due to one draw less than 43 in 2Q17 while average ticket sales dipped slightly by 1% from RM15.7m per draw. YTD, 1H18 net income rose 14% from RM90.5m in 1H18 despite flattish revenue. The rise in earnings was largely due to better luck factor of 66.3% from 67.5% previously. Generally, average ticket sales per draw inched up 1% to RM16.2m from RM16.1m while 1H18 had 88 draws vs. 89 draws in 1H17.

Minimal impact on special draw cut; neutral impact on SST. The Finance Minister had said that the special draw for NFO will be reduced starting next year. We believe the impact is fairly minimal financially although it affects market sentiment. This is because there is a 10% special tax imposed on special draw which reduces operating margin to c.2% from c.11% for normal draw while special draw’s ticket sales are about 10%-20% lower than normal draw. As such, should the 2019 special draw is reduced to 10 from 26 in 2017, FY19 estimates will be reduced slightly by less than 2%. Meanwhile, the reintroduction of SST from Sep 1 will have neutral impact to the NFO players as it just replaces the GST.

Still OUTPERFORM. Post-2Q18 results, we fine-tuned FY18-FY19 estimates, with downward adjustment by 2% each solely for higher effective tax rate assumption of 30% from 28%. This also reduced our DCF-driven target price to RM2.25 from RM2.30. Although the impending special draw cut will crimp earning, which is minimal, the sustainability of ticket sales, of which we believe is high, is the key factor to its future profitability. Thus, we retain our OUTPERFORM rating, which is supported by above average yield of c.6%. Risks to our call include poorer luck factors as well as sluggish ticket sales.

Source: Kenanga Research - 27 Aug 2018