While 9M19 earnings were largely on track, the solid ticket sales, thanks to enforcement clampdown on illegal operators, led us to believe that the NFO player is now seeing daylight after five long gloomy years. We also saw the same trend in MAGNUM’s latest earnings results last month as well. Keep OUTPERFORM with a revised target of RM2.65 given its undemanding valuation as well as an attractive dividend yield of 7%.

9M19 met expectations. At 75%/74% of house/street’s FY19 estimates, 9M19 net profit of RM206.2m came in within expectations. Meanwhile, it declared 3rd interim NDPS of 3.5 sen (ex-date: 10 Apr 2019; payment date: 10 May 2019) in 3Q19 which is slightly lower than the 4.0 sen each paid in 2Q19 and 3Q18. This took YTD 9M19 NDPS to 11.5 sen against 12.0 sen paid in 9M18.

Lower PGMC earnings weighed on strong ticket sales. Despite revenue inching up 1%, 3Q19 net profit fell 2% sequentially to RM59.1m from RM60.3m, largely due to lower lease rental income for PGMC which resulted in pre-tax profit declining to RM5.2m from RM22.7m. In fact, NFO continued to record solid number with average ticket sales per draw improving 3% to RM19.9m from RM19.3m as authority’s clampdown on illegal operators. This is despite lower total ticket sales by 1% as 3Q19 had 44 draws as compared to 46 draws in 2Q19. Overall, NFO earnings were higher on a lower prize payout ratio (EPPR) of 62.3% from 65.4%. Meanwhile, HR Owen (HRO) posted higher earnings of RM15.8m from RM6.3m on higher car sales.

HRO led YTD numbers. 3Q19 results were fairly flattish against 3Q18 earnings as the higher ticket sales per draw of RM19.9m vs. RM19.0m, offset lower draw conducted at 44 vs. 47. HRO reported higher earnings of RM15.8m from RM13.0m on higher car sales. YTD, 9M19 earnings rose 6% to RM206.2m primarily attributed to higher HRO earning of RM44.9m from RM31.4m last year due to the abovementioned higher car sales. 9M19 average ticket sales per draw slid slightly to RM19.6m from RM19.7m in 9M18. However, as the number of draws was 133 against 134, overall ticket sales fell only slightly by 1% to RM2.61b from RM2.64b previously. Meanwhile, 9M19 EPPR was about the same at 62.7% from 62.3%.

Expecting overall ticket sales to decline on special draw cut. With annual special draw reduced to 10 draws from 22 draws, we trimmed FY19 estimates slightly by 2.0% as we reduced our draw day assumption to 174 from 179 coupled with fine-tuning after the 9M19 results. For FY20, we lowered draw day assumption to 166 from 179 while imputing higher average ticket sales per draw to RM20.5m from RM20.3m given the solid sales following the clamp-down of illegal operators. This reduced our FY20E CNP slightly by 0.7%. Although we expect overall ticket sales to come off in the near term on special draw cut, the NFO player should benefit from improved average ticket sales per draw over the longer term.

Keep OUTPERFORM. Despite share price rising 12% YTD and near- term lower ticket sales, we believe there is still room for higher earnings should enforcement continues against the illegal operators, as this effort will boost ticket sales and bottom-line. This has both been witnessed in BJTOTO’s and MAGNUM’s (OP; TP: RM2.50) recent results. We continue to rate BJTOTO an OUTPERFORM given its attractive valuations of 11.5x FY20 PER coupled with above average yield of 7%. Our DCF-derived target price is also raised to RM2.65 from RM2.55 on lower WACC of 5.6% from 5.9% to reflect its improved risk profile. Downside risks to our call include: (i) decline in ticket sales, and (ii) higher-than-expected EPPR.

Source: Kenanga Research - 19 Mar 2019