1H19 earnings matched expectations. The 31% fall in 2Q19 earning is not unexpected given the normalisation of luck factor after an exceptional run in the preceding quarter. Meanwhile, the mild slide in ticket sales is not alarming as the downtrend had abated in the past one year. It remains an OUTPERFORM with a revised target of RM2.55 given undemanding valuation as well as attractive yield of 7-8%.

1H19 matched expectations. Although 2Q19 earnings fell 31% QoQ to RM60.3m owing to normalisation of luck factor, the earnings are on track with 1H19 net profit of RM147.2m making up 53%/51% of house/street’s FY19 estimates. Meanwhile, it declared 2nd interim NDPS of 4.0 sen (ex-date: 16 Jan 2019; payment date: 12 Feb 2019) in 2Q19 which is the same as in 1Q19 and 2Q18. YTD 1H19 NDPS of 8.0 sen is also the same as 1H18.

Luck factor normalised. As expected, after a strong 1Q19, 2Q19 net income fell 31% QoQ to RM60.3m from RM86.9m as luck factor normalised after a good luck factor of 60.4% in 1Q19. Prize pay-out ratio (EPPR) is estimated at 62.9% in 2Q19. The fall in earnings is also attributed to HR Owen (HRO) which saw earnings falling 72% to RM6.3m from RM22.8m as revenue declined 25% due to the delay of delivery of cars. However, ticket sales rose 5% to RM888.9m as 2Q19 conducted 46 draws vs. 43 draws previously. However, average ticket sales per draw fell slightly by 2% to RM19.3m from RM19.7m which is still fairly stable. Meanwhile, share of loss for associate narrowed to RM1.5m from RM4.4m previously.

Weaker ticket sales but not alarming. 2Q19 net profit fell 2% from RM61.7m in 2Q18 as revenue dipped 2% over the year. The decline in earnings was led by weaker NFO earnings, which slid 6% as ticket sales dropped 1% coupled with a slight increase in EPPR of 62.2%. 2Q19 average ticket sales per draw fell 3% from RM20.0m with 46 draws in 2Q19 from 45 draws previously. YTD, 1H19 net profit grew 8% to RM147.2m despite flattish revenue due to better luck factor of 61.7% vs. 62.2% as well as higher HRO earnings by RM10.7m or 58%. On the flip side, NFO ticket sales dipped 1% as average ticket sales per draw fell 3% to RM19.5m from RM20.1m previously although with more draws of 89 from 87. Nonetheless, this is not alarming as it has apparently stabilised.

Neutral to minimal impact from SST and special draw cut. Barring "luck factor", BJTOTO could see minimal downtick-to-flattish trend in ticket sales in 2H19 as opposed to 1H19 following the reintroduction of SST after the 3-month zero-rated GST in Jun-Aug as it was just a replacement of GST prior to June this year. 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 that crimps profitability. We estimate that if special draw days are reduced to 10 from 22 currently, players will see their earnings dropping by 2-3%.

Keep OUTPERFORM. With the stabilising ticket sales in the past one year, we believe the downtrend should have abated. Thus, we believe the downside risk in earnings is fairly minimal. As such, we continue to rate BJTOTO an OUTPERFORM given attractive valuation of 11x FY19 PER as well as above-average yields of 7-8%. However, we reduced our DCF-derived target price to RM2.55 from RM2.65 after adjusting for FY18A numbers. Downside risks to our call include: (i) decline in ticket sales, and (ii) higher-than-expected EPPR.

Source: Kenanga Research - 10 Dec 2018