3QFY21 net profit of RM18.7m met expectation, as the sharp earnings contraction was highly anticipated given the 1-month long NFO outlet closures under MCO 2.0. However, earnings should recover swiftly, as the case was in 1HFY21, with ticket sales recovering back to 80-85% of pre-COVID-19 levels. Thus, its earnings remain resilient which supports an attractive dividend yield of >5%. OUTPERFORM maintained as well as TP of RM2.45.

Weak 3QFY21, as expected… The 71% sequential decline in net profit to RM18.7m in 3QFY21 was highly anticipated on the back of MCO 2.0-led 1-month long outlet closures. This brought YTD 9MFY21 net profit to RM151.6m which matched expectations, at 84%/73% of house/street’s FY21 estimates. Meanwhile, it declared a 3rd interim NDPS of 1.5 sen (ex-date: 29 Jun; payment date: 16 Jul), tallying 9MFY21 NDPS to 8.0 sen which is the same as 9MFY20.

...as MCO 2.0 weighed on ticket sales… 3QFY21 net profit plunged 71% QoQ to RM18.7m from RM65.1m in the previous quarter while revenue slid 9% to RM1.12b, largely due to outlet closures in MCO 2.0 that led to a 30% decline in ticket sales to RM519.9m. As a result, average ticket sales per draw fell to new low of RM11.6m from RM17.6m in 2QFY21 despite the higher numbers of draw at 45 vs. 42. To recap, in the hardest-hit quarter during MCO 1.0 - 4QFY20, average ticket sales per draw was still higher at RM12.3m. In addition, the soft NFO earnings were dampened by higher prize payout ratio. On a positive note, HR Owen (HRO) reported the best quarterly operating profit which jumped to RM24.7m due to higher car sales coupled with favourable GBP conversion into MYR as well as British Government’s pandemic-related financial reliefs.

…but superb HRO earnings mitigated earnings downside. YoY, 3QFY21 net profit contracted 62% from RM48.6m in 3QFY20 as revenue plummeted 16% given the MCO 2.0 1-month long outlet closures for all states except Sarawak whereas 3QFY20 enjoyed pre- COVID-19 ticket sales with only two weeks of lockdown (during MCO 1.0). However, HRO posted strong car sales, and coupled with favourable forex and government’s reliefs, all these led to an 86% jump in EBIT. Similarly, YTD 9MFY21 net profit fell 15% to RM151.6m on the back of similar reasons as the pandemic hit ticket sales but HRO reported impressive car sales.

Earnings to improve from 4QFY21. Although MCO 3.0 is still on- going currently, NFO outlets are allowed to operate with SOP restriction with ticket sales recovering again back to 80%-85% of pre- COVID-19 levels from c.15% during MCO 2.0 in 3QFY21. As such, unless there is another MCO 1.0-like lockdown, ticket sales should have bottomed during MCO 2.0. Hence, 4QFY21 results should improve sequentially. Meanwhile, strong HRO earnings may not be sustainable as current earnings are partly bolstered by grants and reliefs.

Maintain OP on attractive valuations. Post earnings, we keep our estimates unchanged in which we expect earnings to pick up swiftly as was witnessed in 1HFY21 ticket sales. As such, this proves its earnings resiliency, rendering its attractive yields sustainable and making it a good avenue for income seekers. Hence, we reiterate our OP rating with unchanged DCF-derived TP of RM2.45. Risk to our recommendation is a slower-than-expected ticket sales recovery and unfavourable luck factor.

Source: Kenanga Research - 21 May 2021