FY18 results were impressive, led by strong ticket sales and luck factor. In fact, 4Q18 average ticket sale per draw is the highest since 1Q15. With active enforcement curbing the illegal operators, we should see ticket sales improving further. Hence, we revise up FY19 estimates by 2% despite the special draws cut by half. Maintain OP at revised TP of RM2.50/DCF share.

FY18 beat expectations. At 115%/111% of house/street’s estimates, FY18 core profit of RM247.2m came in above expectations owing to: (i) strong ticket sales in 4Q18, which jumped 9% QoQ, bringing FY18 ticket sales to RM2.93b, 3% higher than our estimate of RM2.88b, and (ii) luck factor remaining favourable at 63.6% in 4Q18, resulting in FY18 estimated Prize Payout Ratio (EPPR) of 64.8% vs. our assumption of 66%. Meanwhile, it declared a 4th and final NDPS of 4.0 sen (ex-date: 13 Mar; payment date: 29 Mar) in 4Q18, which is same as 3Q18 and 4Q17. FY18 NDPS of 15.0 sen (87% payout) is higher than our assumption of 12.0 sen (80% payout) and FY17’s 11.0 sen.

4Q18 boosted by strong ticket sales and luck factor. 4Q18 core profit inched up slightly to RM72.3m from RM71.9m in 3Q18 despite revenue increasing 9% to RM724.4m, as the strong ticket sales were mitigated by depreciation charges. The strong ticket sales, which drew RM17.5m per draw that is 13% QoQ higher than RM15.4m in 3Q18, was due to: (i) higher jackpot prizes attracting more sales, and (ii) more active enforcement on illegal operators by the authority. 4Q18 had less numbers of draw day of 45 vs. 47 in 3Q18 while EPPR stayed favourably at 63.6% vs. 63.2% previously. Besides, the previous 3Q18 results were partly boosted by the zero-rated GST period.

Ticket sales led YoY growth too. Similarly, 4Q18 and FY18 core earnings which soared 37% to RM72.3m and 20% to RM247.2m, respectively, were largely attributed to the same reasons as sequential results on luck factor and stronger ticket sales. EPPR was almost 1ppt higher at 64.7% in 3Q18 while the luck factor in FY18 was lower at 64.8% as compared to 66.0% in FY17. Despite having two draws less at 45 in 4Q18, ticket sales rose 9% on the back of solid average ticket sales per draw growing 12% from RM15.6m/draw. Likewise, FY18 ticket sales grew 2%, although FY17 had three extra draws at 183, due to a 4% hike in average ticket sales per draw to RM16.3m in FY18.

Expecting overall ticket sales to decline in FY19 on special draw cut to 10 draws from 22 draws, which will bring down ticket sales by 5.9% but resulting in a smaller proportion of reduction in bottom-line by 2-3% as these special draws come with 10% additional tax, which will cap profit margin. Nonetheless, we expect higher average ticket sales per draw to RM16.7m from RM16.5m following recent active enforcement on illegal operator by the authority. As such, together with house-keeping adjustments on FY18A, we upped FY19 earnings estimates slightly by 1.9%. We also introduced new FY20 forecasts, which expect earnings to grow by 2% on the back of 2% ticket sales growth while other key assumptions remain the same as FY19. Our dividend is still based on 80% payout.

Keep OUTPERFORM. Post earnings revision, we raised our target price to RM2.50/DCF share or implied CY19 PER of 16x, which is at the 6-year mean, from RM2.25/DCF share. Although share price has risen 19% YTD, we still keep our OUTPERFORM call as the share price has yet to reflect higher ticket sales as authority is curbing the illegal operators. In addition, the stock offers above average yield of >5%. Risks to our call include: (i) poorer luck factors as well as (ii) falling ticket sales.

Source: Kenanga Research - 22 Feb 2019