1QFY20 net profit of RM55.6m met expectation but the 20% share price appreciation in the past two months does not justify an expected poor 2QFY20. Furthermore, further delay of reopening outlets from prolonged MCO restriction will impact earnings even deeper. Thus, we cut the stock to UNDERPERFORM from OUTPERFORM with unchanged TP of RM1.95. Dividend yield is also reduced by a quarter to c.4.5% from >6%.

1QFY20 results in line. At 25% of house/street’s full-year FY20 estimates, 1QFY20 net profit of RM55.6m met expectations as the CNY-led quarter’s average ticket sales per draw of RM18.4m was 2.5% higher than our full-year assumption of RM18.0m while estimated prize payout ratio (EPPR) of 65.1% was about the same as our FY20 assumption of 65%. Having said that, the extended Movement Control Order (MCO) for total 12 weeks has cancelled 36 draws compared to our previous cancellation assumption of 12 draws which could be the same for consensus. Thus, we expect a big cut in consensus postresults release. Meanwhile, it declared 1st NDPS of 2.5 sen (ex-date: 12 Jun; payment date: 26 Jun) in 1QFY20 which is the same as 1QFY19 but lower than 3.0 sen paid in 4QFY19.

Weaker QoQ… 1QFY20 net profit dipped marginally by 1% QoQ to RM55.6m from RM56.3m in the preceding quarter as revenue fell 3% over the quarter to RM609.5m. The weakened results were not unexpected given the cancellation of six draws as MCO started on 18 Mar. As such, total ticket sales fell 3% to RM662.5m as 1QFY20 played 36 draws as opposed to 42 draws conducted in 4QFY19. However, average ticket sales per draw for the CNY-led 1QFY20 jumped 13% to RM18.4m from RM16.3m on seasonality. Luck factor was fairly stable at 65.1% from 65.2%. Nonetheless, the lower magnitude of drop in bottom-line of 1% was largely attributable to lower depreciation of RM0.8m or 24% and taxation by RM3.2m or 13%.

…due largely to MCO closure. YoY, 1QFY20 net profit fell 7% from RM60.0m as revenue contracted 19%, primarily due to MCO lockdown as mentioned above. The greater impact in YoY earnings drop as opposed to QoQ was because ticket sales in 1QFY19 were stronger at RM19.6m per draw vs. RM18.4m this year. As such, with 6 less draws, 1QFY20 total ticket sales contracted 19% to RM662.5m from RM822.0m in 1QFY19. However, 1QFY20 luck factor was better with EPPR improving to 65.1% from 66.6%.

Poor quarter expected in 2QFY20. MCO has been extended till 9 Jun and NFO are still not allowed to reopen. Should NFO are allowed to restart after 9 June, there would only be nine draws available in 2QFY20 as compared to the usual quarterly draws of 40-42. As such, the coming 2QFY20 results would be badly hit to as low as RM6m net profit assuming EPPR of 65% and ticket sales of RM17.3m/draw. With the extension of MCO to 9 Jun, we reduced our FY20 draw assumption by another 24 draws to 130 from 154 previously. We also trimmed ticket sales per draw assumption to RM17.3m from RM18.0m with unchanged EPPR of 65%. We also reduced FY21 ticket sales per draw to RM17.9m from RM18.3m with unchanged EPPR of 65% and 166 draws. With this, we cut FY20/FY21 CNP estimates by 22%/1% with dividend cut at the same proportion based on unchanged payout of 80%.

Cut to UNDERPERFORM from OUTPERFORM as share price has recovered 20% in the past two months. We expect near-term price volatility given the expected poor 2QFY20 results. In addition, being an unessential service provider, any delay of reopening economy from MCO will impact earnings further. We keep our target price of RM1.95 which is based on 1.12x PBV or -1SD PBV 5-year mean. Risk to our downgrading is earlier than expected of business lifting from MCO restriction.

Source: Kenanga Research - 27 May 2020