1QFY20 results were fairly in line with ticket sales remaining strong at RM20.7m per draw but prize payout ratio was slightly higher at 64.0%. And, we still see uptick in ticket sales given the enforcement’s effort against illegal operators. We are upgrading the stock to OUTPERFORM following recent price weakness with unchanged target price of RM2.80. It also offers above average yield of >5%.

1QFY20 results on track. In its first quarter after changing financial year-end to June from April previously, BJTOTO reported a decent set of 1QFY20 results with net profit of RM67.0m making up 26% of house/street’s FY20 estimates. It also declared 1st interim NDPS of 4.0 sen (ex-date: 12 Dec 2019; payment date: 09 Jan 2020) in 1QFY20. Given the change in financial year-end, there is no comparable quarter to compare the results.

Ticket sales remained strong but luck weakened slightly. 1QFY20 net profit of RM67.0m was on the back of RM1.44b revenue which saw its average ticket sales per draw staying firm at RM20.7m which is the 2nd strongest for the past 16 quarterly periods after RM21.0m hit in the CNY-quarter of 3QFY19 (financial period for Feb-Apr 2019). This shows the fruitful results of enforcement clamping down on illegal operators. However, estimated prize payout ratio (EPPR) was slightly higher at 64.0% in 1QFY20 which is higher than the average of c.63% recorded in the past three financial year ends.

Losses at associate income narrowed by almost half to RM0.8m against the usual RM1.5m losses in the past, which we believe could be due to the inclusion of Philippine Gaming Management Corporation (PGMC) following BJTOTO’s equity stake in the Philippine unit reduced to 39.99% from a wholly-owned subsidiary previously. As such, the segment results for the gaming unit is now solely for Malaysian operations. On the other hand, depreciation in 1QFY20 almost doubled to RM14.3m from the usual RM7m-RM8m per quarter in the past. We need to clarify on this with management later.

Three special draws cut in 2020 has minimal impact. In the Budget 2020, total number of special draws was cut further to 8 times a year from 11 starting 2020 which will have minimal impact on the NFO players given that these special draws come with 10% additional tax which crimps profitability. While top-line will be reduced by <2%, net profit will be impacted by <1% and the shortfall should be absorbed by potential uptick in ticket sales. On the other hand, the continuous enforcement clamping down on illegal operators will continue to drive NFO’s ticket sales higher.

Upgrade to OUTPERFORM on price weakness. Since our downgrade report issued three months ago, BJTOTO’s share price has contracted 7% which presents an attractive buying opportunity for its upside potential on the back of commendable ticket sales coupled with above average dividend yield of 5%-6%. As such, we are upgrading the stock to OUTPERFORM from MARKET PERFORM previously. Target price maintained at RM2.80/DCF share. Risks to our upgrade include: (i) weaker-than-expected ticket sales, and (ii) higher-thanexpected EPPR.

Source: Kenanga Research - 20 Nov 2019