The Official Kenanga Warrants Blog

BJTOTO: Kenanga Research remains OUTPERFORM at revised TP of RM3.00. (Source: Kenanga Research)

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Publish date: Wed, 19 Jun 2019, 09:37 AM
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As of 19 Jun 2019, If you wish to gain exposure on BJTOTO, we have

- BJTOTO-CY Effective Gearing of 5.21x & 3 Ticks Sensitivity 

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The strong 4Q19 earnings were not unexpected given the CNY effect while luck factor remained stable. Ticket sales continued to grow healthily, which is a positive sign, thanks to enforcement clampdown on illegal operators. Despite strong share performance, BJTOTO remains an OUTPERFORM at revised TP of RM3.00/DCF share for its attractive valuation as well as above average yield of >6%. 

4Q19 results matched expectations. 4Q19 earnings came within expectations with net profit of RM70.2m totalling FY19 net  income to RM276.4m which came in 2%/3% above house/street’s estimates. It declared final NDPS of 4.5 sen (ex-date: 18 Jul; payment date: 16 Aug)  in 4Q19, bringing YTD FY19 NDPS to 16.0 sen, which is the same as FY18, similar to our estimates of 16.1 sen.
 
Earnings driven by luck factor while ticket sales remained strong. 4Q19 net profit jumped 19% sequentially to RM70.2m, while revenue leapt 11%, on the back of a better luck factor while ticket sales remained strong which partly attributable to the CNY effect. The estimated prize payout ratio (EPPR) fell to 61.9% from 62.3% in 3Q19 was the main contributor to earnings growth in 4Q19. Total ticket sales grew slightly by 1% on the back drop of 41 draws in 4Q19 against 44 draws previously, as ticket sales per draw basis rose strongly by 9% to RM21.7m from RM19.9m given partly to CNY factor. Meanwhile, HR Owen (HRO) posted 25% jump in revenue given higher car sales, but operating profit fell 18% due to higher opex.
 
Broad-base improvement for yearly results. 4Q19 net profit doubled from RM35.2m in 4Q18 as the previous quarter was hit by an extreme poor luck factor which saw its EPPR deteriorating sharply to 65.1%. Nonetheless, total ticket sales were flattish as the 7% hike in sales per draw from RM20.3m was mitigated by lower draws of 41 vs. 44. HRO also posted a slight drop in earnings by RM1.4m or 10%. YTD, FY19 net profit leapt 20% to RM276.4m, largely due to lower investment expense by RM30.1m, while revenue inched up 1%. Overall, earnings improvement was across NFO and HRO with NFO’s earnings rising 3% on better luck of 62.5% vs. 63.0% and ticket sales per draw improved by 1% to RM20.1m from RM19.9m, while HRO posted 27% higher profit owing to lower opex following the closure and disposal of certain loss-making sectors.
 
Expecting overall ticket sales to decline on special draw cut. We expect the number of draws in FY20 to reduce further to 166 from 174 in FY19 after a cut in special draw to 10 draws which started in 2019 from 22 draws previously. In the past, BJTOTO conducted around 178- 179 draws per year in FY14 to FY18. Nonetheless, the special draw cut has minimal earnings impact given these special draws come with 10% additional tax which crimps profitability. In all, we fine-tune FY20 estimates upward by 0.6% after adjusting for FY19 reported numbers. At the same time, we introduced FY21 earnings forecast which earnings to grow at 2.6% on the back of 2% hike in ticket sales.
 
OUTPERFORM retained. Despite share price rising strongly by 23% YTD, we still believe there is still room for higher earnings given the continuous enforcement against the illegal operators. It still trades at attractive PER of 12x-13x with above average yield of >6%. As such, we continue to rate the stock an OUTPERFORM with a revised target price of RM3.00/DCF share from RM2.95/DCF share as we rolled over valuation base-year to FY20 from FY19. The new target price implies an undemanding FY20 PER of 14.4x. Downside risks to our call include: (i) decline in ticket sales, and (ii) higher-than-expected EPPR.

 

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