1Q19 results came with no surprises with an impressive 4% ticket sales growth as average ticket sales per draw jumped 12% to RM19.6m, the highest since 1Q13. With active enforcement curbing illegal operators, we should see ticket sales improving further. We maintain our OUTPERFORM call with a revised target price of RM2.55/DCF share and also with an above-average yield of >5%.

1Q19 within expectations. At 27%/26% of house/street’s FY19 fullyear estimates, 1Q19 Net Profit of RM60.0m came with expectations. It declared a 1st interim NDPS of 4.0 sen (ex-date: 18 Jun; payment date: 28 Jun) during the quarter which is the same as 4Q18 and 1Q18.

Impressive CNY ticket sales. Despite revenue rising 4%, 1Q19 net profit contracted 17% sequentially to RM60.0m from RM72.3m in 4Q18 largely due to favourable luck registered in the preceding quarter with an estimated Prize Payout Ratio (EPPR) of 63.6% vs. the current quarter’s 65.2%. On the other hand, although having less draws of 42 against 45 in 4Q18, total ticket sales rose 4% to RM822.0m as average ticket sales per draw jumped 12% to RM19.6m, the highest since 1Q13, from RM17.5m previously, which was largely due to CNY-effect in addition to the active enforcement on illegal operators by the authority.

Ticket sales and better luck led YoY growth. Similarly, comparing to 1Q18, 4Q19 ticket sales also increased strongly, by 6%, to RM756.2m from RM712.3m despite less four draws from 46 to 42 as average ticket sales per draw jumped 16% to RM19.6m from RM16.8m thanks to the clamping down on illegal operators by the authorities as mentioned earlier. With the strong ticket sales and slightly better luck factor of 65.2% vs. 66.1%, 1Q19 net profit rose 9% from RM55.7m in 1Q18 to RM60.0m in 1Q19.

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 caps 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. Although 1Q19 ticket sales per draw were strong at RM19.6m due to the CNY-effect, we are comfortable with our FY16.7m average ticket sales per draw assumption. In all, we keep our FY19-FY20 estimates unchanged.

Reiterate OUTPERFORM. With enforcement combating illegal operators, we will continue to see recovery of ticket sales for the legal NFO. So far, we see both MAGNUM and BJTOTO (OP; TP: RM2.95) registering encouraging ticket sales growth in the past quarters. Although share price has risen 18.5% YTD, we still keep our OUTPERFORM call as we believe this has yet to reflect higher ticket sales as authority is clamping down on the illegal operators. Our new target price is raised slightly to RM2.55/DCF share, implying FY20E PER of 16x, which is at the 6-year mean, from RM2.50/DCF share, as we roll over the valuation base-year to FY20 from FY19. Risks to our call include: (i) poorer luck factors as well as (ii) falling ticket sales.

Source: Kenanga Research - 29 May 2019