A weaker sequential 3QFY19 results, but still on track to meeting forecast, partly due to poorer luck factor coupled with softer ticket sales on lower 4D jackpot sales. In fact, ticket sales remained firm as compared to last year, thanks to enforcement’s effort in clamping down illegal operators. But, it is fairly priced after a strong rally of 41% YTD. Retain MARKET PERFORM at target price of RM2.80.

3QFY19 broadly in line. At 70%/71% of house/street’s FY19 estimates, 9MFY19 net profit of RM182.4m came broadly in line. It declared a 3rd interim NDPS of 4.0 sen (ex-date: 13 Dec; payment date: 27 Dec) in 3QFY19, vs. 5.0 sen and 4.0 sen paid in 2QFY19 and 3QFY18, respectively, totalling 9MFY19 NDPS to 13.0 sen which is higher than the 11.0 sen paid in 9MFY18.

Sequential results impacted by luck factor. 3QFY19 net profit contracted 35% QoQ to RM48.0m, while revenue dipped 2% to RM652.1m, owing to higher estimated prize payout ratio (EPPR) at 66.5% against 62.3% in the preceding quarter. This brought pre-tax profit for NFO business lower by 28% or RM29.3m. The lower earnings were also partly attributable to lower ticket sales by 2% to RM708.8m, despite having one extra draw at 42, with average ticket sales per draw falling 4% to RM16.9m from RM17.7m which was due to lower sales from the 4D jackpot game.

Ticket sales remained firmer than last year. YoY, 3QFY19 net profit declined 33% from RM71.9m largely due to the said luck factor of 66.5% from 63.2% in 3QFY18. This was also on the back of 2% drop in total ticket sales as 3QFY18 had 5 extra draws than that of 42 in 3QFY19. However, average ticket sale per draw was still 9% higher than RM15.4m in 3QFY18. YTD, 9MFY19 net profit rose 4% to RM182.4m on the back of 5% hike in revenue. This was due to 5% jump in ticket sales coupled with a better luck factor of 64.7% from 65.3%. In addition, average ticket sales per draw surged 13% to RM18.0m from RM15.9m last year.

Three special draw cut in 2020 has minimal impact. In Budget 2020, the total number of special draws was cut further to 8 times a year, from 11, starting from 2020 onwards which will have minimal impact to 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.

Keep MP for its yield. With enforcement combating illegal operators, we will continue to see recovery of ticket sales for the legal NFOs, for both MAGNUM and BJTOTO (OP; TP: RM2.80). Nonetheless, the strong rally pushing its share price by 41% YTD should have reflected all near-term positives. Thus, we keep our MARKET PERFORM for now with unchanged target price of RM2.80/DCF share. The target price implied CY20 PER of 15.1x which is in-line with its 1SD above its 3-year mean of 15.5x. Upside risks to our call include: (i) favourable luck factors as well as (ii) stronger-than-expected ticket sales.

Source: Kenanga Research - 20 Nov 2019