The 1QFY22 loss was already highly anticipated given the MCO 3.0 lockdown. However, recovery in ticket sales post-re-opening has been slow, initially booking 50%-60% of pre-COVID level to 70%-75% currently against 80%-85% prior to the lockdown. We are now expecting recovery to 80-85% level in 2HFY22 before a full recovery in FY23. Even then, BJTOTO still offers above-average dividend yield of >5% with potential recovery to >7%. As such, we continue to rate the stock an OP with a revised TP of RM2.23.

The loss in 1QFY22 was already expected given the lockdown closure but ticket sales after reopening of 50%-60% at pre-COVID level was much lower than the 80%-85% levels prior to the MCO 3.0 lockdown. 1QFY22 core loss of RM17.7m was posted against house/street’s FY22 net profit forecasts of RM209.2m/RM168.8m. Despite the losses, 1st NDPS of 1.0 sen (ex-date: 16 Dec 2021; payment date: 05 Jan 2022) was declared in 1QFY22 which is not a surprise as the reopening of outlets has improved earnings certainty.

Lockdown closure hit earnings badly with 1QFY22 turning to core loss of RM17.7m against core profit of RM30.5m in the preceding quarter as revenue plunged 29% over the quarter. There was only 8 draws in 1QFY22 against 28 draws in 4QFY21 given the cancellation of 37 draws from 15 draws due to the MCO 3.0 lockdown. However, average ticket sales per draw fell sharply to RM10.1m from RM17.5m while we also estimated that prize payout ratio (EPPR) rose to 65.9% from 62.2%. This led to its NFO operations reported operating loss of RM26.6m from EBIT of RM47.8m previously. However, HR Owen (HRO)’s earnings remained strong at RM27.3m from RM28.4m while share of associate income turned positive with RM0.5m profit from loss of RM6.2m previously given the overall improved results from the Philippines units as movement restriction there eased.

HRO’s earnings remained strong. Comparing to core profit of RM67.9m in 1QFY21, 1QFY22 losses were largely attributable to the abovementioned MCO 3.0 lockdown where 1QFY21 conducted 42 draws vs. 8 draws in 1QFY22 while average ticket sales per draw was RM17.0m against RM10.1m. 1QFY22 EPPR was 65.9% from 62.2% previously. Similarly to sequential comparison, HRO also posted 23% YoY jump in EBIT from RM22.1m while share of associate income turned profitable from loss of RM5.6m last year.

2QFY22 to turn around but ticket sales may still be weak. Although NFO outlets were allowed to re-open from 14 Sep 2021 against our assumption of 01 Oct, overall FY22 ticket sales is expected to be lower than our estimates given the slow recovery standing at 70%-75% currently of pre-COVID levels against 80-85% prior to MCO 3.0 lockdown. Together with Kedah banning NFO outlets, we cut FY22E/FY23E ticket sales by 2%/9% to RM2.46b/RM3.06b. On the other hand, we downgrade FY22/FY23 earnings estimates by 11%/12% given the ticket sales cut, one-off Prosperity Tax in 2022 but keep associate income assumption unchanged for now pending sustainability.

Reiterate OP on good valuations. We still like this yielding stock which is supported by its earnings resiliency, making it a good avenue for income seekers. While 1QFY22 ticket sales recovery may be slow, we expect ticket sales to pick up swiftly to 80-85% of pre-COVID level in 2HFY22 and a full recovery is expected in FY23. Post earnings revision, our DCF-derived TP is trimmed slightly to RM2.23 from RM2.42. It remains as OP. Risks to our call include a slower-than-expected ticket sales recovery and unfavourable luck factor.

Source: Kenanga Research - 19 Nov 2021