Although 1Q19 net profit rebounded strongly by 147% sequentially to RM87m, we view the results as matching expectation as we believe the contributing favourable luck factor is not sustainable. On the other hand, the slightly weaker ticket sales are also not alarming on the seasonality factor. Going forth, the reintroduction of SST and special draw days cut are expected to have a minimal impact. OUTPERFORM maintained at RM2.65/DCF share.

Solid 1Q19 results. 1Q19 net profit surged 147% sequentially to RM86.9m which made up 31% of both house/street’s FY19 estimates largely due to extremely good “luck factor” of 60.4% against our FY19 estimated prize payout ratio (EPPR) of 62%. However, we consider the results to be within expectation given that such lower payout is unlikely to sustain, as such favourable payout was last seen more than two years ago in 4Q16 at 58.2%. Meanwhile, it declared 1st interim NDPS of 4.0 sen (ex-date: 03 Oct; payment date: 23 Oct) in 1Q19 which is the same as in 4Q18 and 1Q18.

Good “luck factor” boosted earnings… Net profit rebounded strongly from RM35.2m in 4Q18 to RM86.9m in 1Q19, while revenue rose 7% over the quarter. The strong results were largely attributable to good "luck factor" of 60.4% against 65.1% payout previously, despite ticket sales falling 5% owing to CNY-led quarter in 4Q18; thus, average sales per draw dropped 3% QoQ to RM19.7m from RM20.3m as well as due to less one draw in 1Q19 at 43. The 7% rise in revenue was attributed to higher HR Owen (HRO) revenue, which leapt 23% to RM698.7m owing to higher new car sales. Meanwhile, associate income turned to losses of RM4.4m from profit of RM9.4m in 4Q18.

…but weaker ticket sales YoY. Similarly, 1Q19 net profit rose 17% from RM74.3m in 1Q18 due to better luck factor while revenue inched up 2% YoY. The EPPR was 62.1% a year ago. Again, the higher revenue was helped by higher HRO revenue, which was up 4% despite flattish NFO ticket sales at RM780.1m. 1Q19 average ticket sales per draw also fell 3% from RM20.2m in 1Q18 while 1Q19 played 43 draws against 42 draws in 1Q18. On the other hand, losses at the associate level widened to RM4.4m from RM1.8m in 1Q18.

Neutral to minimal impact from SST and special draw cut. Barring "luck factor", BJTOTO should continue to enjoy better earnings given the remaining one month effect of zero-rated GST in August while the reintroduction of SST, which started in September, should have a neutral impact to the NFO player as it is just a replacement of GST. On the other hand, the reduction of special draw days in 2019 should have a minimal impact to BJTOTO, as these draw come with 10% additional tax which crimp profitability. We estimate that for special draw being reduced to 10 from 22 currently, the player will see earnings drop by 2%-3%.

Reiterate OUTPERFORM. Although 1Q19 results were extremely strong, we keep our FY19 estimates unchanged as we believe the low EPPR of 60.4% is unsustainable as the average payout in FY17-FY18 was above 63%. Meanwhile, we introduced new FY20 estimates with earnings set to grow by 1.6% as we expect ticket sales growth of 1% with EPPR of 62%. We continue to rate BJTOTO an OUTPERFORM given attractive valuation of 11x FY19 PER as well as above average yields of 7%. Downside risks to our call include: (i) persistent decline in ticket sales, and (ii) higher-than-expected EPPR.

Source: Kenanga Research - 20 Sept 2018