Although FY20 core profit of RM102.0m missed forecast on non-core business, the recovery of NFO ticket sales in 4QFY20 was remarkable, at 84% of pre-COVID level. In all, ticket sales should recover in 2HFY21 after the current MCO 2.0 before a “business as usual” environment emerges in FY22. However, with near-term positives seemingly reflected in its share price, the stock remains as MP with a higher TP of RM2.15. The stock is supported by a decent c.5% yield.

FY20 missed forecast. Although core profit rose 31% QoQ to RM39.8m, 4QFY20 results were still below forecast as the FY20 core profit of RM102.0 came 12%/11% below house’s/street’s estimates. This is merely due to the lower earnings contribution from the Corporate & Others segment on the full-year FY20 basis. In fact, the core NFO business earnings were fairly on track with segment PBT only 2% short of our forecast. Meanwhile, it declared a 4th interim NDPS of 2.0 sen (ex-date: 12 Mar; payment date: 26 Mar), totalling FY20 NDPS to 8.5 sen which is lower than that of the 16.0 sen paid in FY19 but higher than our FY20 forecast of 6.4 sen.

Commendable sequential ticket sales led 4QFY20 core profit higher by 31% to RM39.8m from RM30.3m in the preceding quarter as overall ticket sales rose 9% to RM573.0m or RM13.6m per draw from RM527.8m and RM12.6m previously with unchanged 42 draws conducted. In fact, the higher estimated prize payout ratio (EPPR) of 67.1% from 66.7% did not affect its bottom-line given the strong ticket sales. Note that the core profit is adjusted for a RM63.9m settlement with IRB plus RM16.7m penalty.

A good ticket sales recovery from pre-COVID period. After a 26% YoY decline in ticket sales in 3QFY20, it managed to narrow the decline to 16% in 4QFY20 implying 84% of pre-COVID level, better than BJTOTO (OP; TP: RM2.45) of 80%. With the lower ticket sales together with a poorer luck factor from 66.0%, 4QFY20 core profit contracted 29% from RM56.3m in 4QFY19. YTD, FY20 core profit tumbled 57% to RM102.0m from RM238.7m with total ticket sales falling 38% given the cancellation of 40 draws during MCO 1.0 lockdown period and the sequential impact from the pandemic.

Expecting a weaker 1QFY21. Under the on-going MCO 2.0 with its outlets in all states except Sarawak closed from 13 Jan to 26 Jan, upcoming 1QFY21 ticket sales is expected to be weakened again but should be better than that of MCO 1.0 as the outlets were then closed for almost the entire quarter in 2QFY20. With this, we cut FY21 earnings estimates by 10% as we lower ticket sales by 10% to RM14.3m/draw from RM16.0m/draw previously. At the same time, we launched new FY22 estimates with earnings growth of 18% as we expect sales to normalise to RM17.0m/draw. Our NDPS is based on unchanged 80% payout ratio.

Reflected in the price; MARKET PERFORM maintained. While we expect ticket sales to recover in 2HFY21 before a “business as usual” environment emerges in FY22, we believe near-term catalysts are already mostly priced in at the moment. As such, we keep our MARKET PERFORM rating with a higher target price of RM2.15/DCF share from RM2.10/DCF share as we rolled over our valuation base year to FY22E. Our call is still supported by a decent yield of c.5%. Risk to our recommendation is a quicker-than-expected recovery of ticket sales.

Source: Kenanga Research - 26 Feb 2021