The MCO will take away in total 12 draws for the year leading to an 8% cut in our FY20 estimates. But, we may see additional special draws in the near future to raise tax revenues for the government in this difficult time, although it will not be earnings enhancing for BJTOTO. The 16% YTD share price contraction has not fully reflected the COVID-19 risk yet. Thus, we cut BJTOTO to MP with a lower TP of RM2.25. Ideal entry price is RM1.90.

MCO to extend for another two weeks. Due to the extension of the Movement Control Order (MCO) to combat the COVID-19 outbreak, Sports Toto Malaysia will continue to suspend operations until 14 April 2020. As such, there will be no draws in these four weeks against the normal operations of 12 draws. Based on our FY20 ticket sales assumption of RM20.0m per draw, there will be a loss of RM240.0m ticket sales in these four weeks. For now, we believe our RM20.0m ticket sales per draw is still not overly bullish under such depressed market condition as the 1HFY20 average ticket sales per draw was higher at RM21.3m.

FY20 estimates to reduce by 8%. With the new total draws for FY20 reduced to 154 from our previous assumption of 166, and unchanged estimated prize payout ratio (EPPR) of 62%, we cut FY20E estimates by 8.2% while FY21E forecast is revised slightly downward by 0.4% on cash-flow fine-tuning, although there are no changes in assumptions. On the other hand, although there are 12 less draws for the year, we may see higher special draws from eight currently given the purpose of special draws for emergency events and COVID-19 is a good reason to have extra special draws to raise tax revenues for the government. However, special draw has minimal earnings enhancement to the NFO operators as it comes with additional 10% tax.

PBV to value the stock. Share price of BJTOTO was barely hit by the COVID-19 outbreak initially as in Feb the stock was about 5% lower from its 52-week high of RM2.82 but the order of MCO which started on 18 March escalated the sell-down to push the stock to its 52-week low of RM1.94 last week, 31% from the peak. Given the depressed business environment due to restricted business activities, earnings prospect is challenging and hard to forecast in the near term, we believe PBV valuation methodology is more appropriate to apply in the current market condition. BJTOTO and its peer MAGNUM both are now trading closer to their 1.5SD below its 5-mean of PBV. At current environment, we will place -1SD as the fair value level while the ideal buying zone should be at -2SD as we assume a level of full-blown financial crisis.

Stay away; downgrade to MARKET PERFORM. We cut our target price to RM2.25 which is based on 4.27x PBV or -1SD PBV 5-year mean from RM2.80/DCF share as we changed to our new valuation method. Although we like BJTOTO for its resilient earnings profile backed by improved ticket sales, as well as attractive yield, we believe there is still downside risk under such market volatility. We are comfortable to be a buyer again at entry point of RM1.90 at 3.62x PBV or -2SD PBV 5-year mean. As such, we downgrade the stock to MARKET PERFORM from OUTPERFORM previously. The new call is supported by an above average yield of >6%. Risk to our downgrade is the fast recovery of economy if COVID-19 subsides faster than expected.

Source: Kenanga Research - 26 Mar 2020