Despite already gained strongly by 25% YTD, we still see value in BJTOTO on potential upticks in ticket sales driven mainly by authority actively clamping down on illegal operators. In fact, sin stocks are in the spotlight as investors search for yielding stocks. Another plus point, BJTOTO is also the cheapest sin stock with the highest dividend yield among peers. It remains as OP and our TOP PICK for 2Q19 Strategy at a revised TP of RM2.95.

Better ticket sales. Last Friday, we met up with management to get updates pertaining to ticket sales, which saw upticks in the past two quarters. Management was excited as the enforcement combating illegal operators, which started last September, has resulted in switching to licensed operators as rival MAGNUM (OP; TP: RM2.50) also experienced a similar trend in the past quarters. We understand that illegal operators had evolved to operate in physical shop which was the target of enforcement, especially in the Klang Valley. Since then, BJTOTO saw ticket sales for Classic 4D rising 5%, which is fairly encouraging. The enforcement’s effort is healthy for the NFO players as the size for black market is easily 1-2 times bigger than the licensed NFO volumes.

Non-Sport Toto contributions still small and volatile. While the local NFO contributes >80% to the group’s pre-tax profit, earnings from Philippine-based PGMC and UK unit HR Owen (HRO) could be volatile. In fact, reported pre-tax profit from PGMC fell to RM5.2m in 3Q19 from RM22.7m in 2Q19 owing to lower leased rental income as contract for the lottery system machine expired last August. As such, in the interim, PGMC continues to receive lower rental income until a new contract is sorted out. Earnings from the super sport cars dealer HRO were fairly volatile in the past given the auto sales value coupled with the volatility of GBP risk. Meanwhile, its 10.2%-owned Vietnamese NFO firm, Berjaya GTI is still in the red, although it has already operated since mid-2016 and is unlikely to be profitable in the near future given the infant NFO market here.

The most attractive sin stocks. BJTOTO had been suppressed in the past five years due to declining ticket sales. However, there was a turn of fortune when it posted a remarkable YTD gain of 25% largely due to improving ticket sales. We also noticed other sin stocks such as MAGNUM and brewers CARLSBG (UP; TP: RM21.80) and HEIM (MP; TP: RM21.90) posting strong YTD gains of 20-32% as we believe investors are looking for laggards with defensive qualities and these stocks offer attractive above-average yields. Even with strong gains, BJTOTO is still a laggard as it is the cheapest among these sin stocks with its highest dividend yield. It trades at 13x PER which is only half of brewers’ valuation while BJTOTO offers >6% yield against the rest at >3%. As such, BJTOTO can be a sector catch-up play.

It still has legs; OP reaffirmed. In view of the earlier ticket sales downtrend finally reversing and better sales ahead on the back of enforcements clamping down illegal market, we decided to raise our terminal growth from 1% to 2%, which is same as MAGNUM’s, while keeping key assumption unchanged, thus we upgrade our target price to RM2.95/DCF share from RM2.65/DCF share previously. We believe our new target price is not excessive as the stock is still the cheapest sin stock with the highest dividend yield. And, our target price also implies prospective PER of 14.7x which is in line with its 3-year and 5- year means. As such, we keep our OUTPERFORM call unchanged.

Downside risks to our call include: (i) decline in ticket sales, and (ii) higher-than-expected EPPR.

Source: Kenanga Research - 8 Apr 2019