3QFY20 net profit of RM48.6m matched expectations but the upcoming 4QFY20 is expected to be extremely weak with three-quarter of draws cancelled due to MCO closure. Meanwhile, average ticket sales per draw in 3QFY20 remained impressive which beat our FY20 assumption by 13%. It remains a MARKET PERFORM with unchanged target price of RM2.25.

3QFY20 results matched expectation. At 74%/78% of house/street’s full-year estimates, 9MFY20 results met expectations, despite an expected weaker 4QFY20 ahead, as the CNY-led quarter’s average ticket sales per draw of RM22.6m was mitigated by higher estimated prize payout ratio (EPPR) of 65.4% vs. our FY20’s assumption of 63%. However, to our negative surprise, it did not declare a quarterly dividend in 3QFY20 for the first time since 2Q-3QFY10. Meanwhile, given the change in financial year-end from April to June in 2019, there are no comparable YoY results.

A weaker sequential result on MCO closure. 3QFY20 net profit plummeted 22% QoQ to RM48.6m from RM61.9m in the preceding quarter as revenue fell 5% to RM1.33b. The weaker results were largely due to the cancellation of six draws as the MCO started on 18 Mar while associate company Philippine Gaming Management Corporation (PGMC) were also affected by the COVID-19-led slowdown which led to share of associate income falling to RM1.2m from RM2.2m. For local NFO, average ticket sales per draw jumped 3% to RM22.6m, the highest since 3QFY12 of RM22.9m, thanks to CNY-led seasonality but luck factor deteriorated to 65.3% from 63.6%. With number of draws reduced to 36 from 42, 3QFY20 total ticket sales fell 12%, leading to NFO operating profit declining 25% to RM79.1m. However, HR Owen (HRO) operating profit improved to RM13.3m from RM7.1m on seasonality.

Poor quarter expected in 4QFY20. MCO has been extended till 9 Jun and NFOs are still not allowed to reopen. Should NFOs are allowed to restart after 9 Jun, there would only be nine draws available in 4QFY20 as compared to the usual quarterly draws of 40-42. As such, the coming 4QFY20 results would be badly hit with net profit declining to as low as c.RM3m as the lockdowns have also affected HRO and PGMC operations. We now assumed 129 draws in FY20 with higher EPPR of 64% from 154 draws and 63% previously but maintained 166 draws and EPPR of 63% in FY21. However, we raised average ticket sales per assumption to RM21.2m/FY21.0m from RM20.0m/RM20.4m for FY20-FY21. Thus, we cut FY20/FY21 estimates by 25%/1% while NDPS is also cut proportionally based on unchanged payout ratio of 80%.

It’s all in the price; keep MARKET PERFORM. Yesterday, all gaming stocks experienced a strong lift of between 6%-11% on expectation that business resumption is just around the corner. However, we believe the run-up is a bit premature on account of an expected weak quarter ahead. We keep our target price of RM2.25, which is based on 4.27x PBV or -1SD PBV 5-year mean, unchanged. Our risk adjusted DCF model valued the stock at RM2.45 which also implies a limited upside from here. Thus, we keep our MARKET PERFORM rating unchanged which is supported by above average yield of >6% over the next 12 months. Risk to our recommendation is a fast recovery of the economy if COVID-19 subsides faster than expected.

Source: Kenanga Research - 3 Jun 2020