Despite a 25% gain YTD, we still see value in BJTOTO as it is the cheapest sin stock with the highest dividend yield among peers. BUY with a target price of RM2.95 implying a prospective PER of 14.7x which is in line with its 3-year and 5- year means. In view of the earlier ticket sales downtrend, we are finally seeing a reversal on the back of the clamping down of illegal market. 

BJTOTO saw upticks in ticket sales over the past two quarters following the curbs on illegal operators, which started last September. We understand that illegal operators had evolved to operate in physical shop which was the target of the enforcement, especially in the Klang Valley. Since then, BJTOTO saw ticket sales for Classic 4D rising 5%, which is fairly encouraging. The enforcement’s effort is healthy for the NFO players as the size for black market is easily 1-2 times bigger than the licensed NFO volumes. 

While the local NFO contributes >80% to the group’s pre-tax profit, earnings from Philippine-based PGMC and UK unit HR Owen (HRO) could be volatile. In fact, reported pre-tax profit from PGMC fell to RM5.2m in 3Q19 from RM22.7m in 2Q19 owing to lower leased rental income as contract for the lottery system machine expired last August. As such, in the interim, PGMC continues to receive lower rental income until a new contract is sorted out. 

Earnings from the super sport cars dealer HRO were fairly volatile in the past given the auto sales value coupled with the volatility of GBP risk. Meanwhile, its 10.2%-owned Vietnamese NFO firm, Berjaya GTI is still in the red, although it has already operated since mid-2016 and is unlikely to be profitable in the near term given the infant NFO market here. 

BJTOTO had been suppressed in the past five years due to declining ticket sales. However, there was a turn of fortune when it posted a remarkable YTD gain of 25% largely due to improving ticket sales. Even with strong gains, BJTOTO is still a laggard as it is the cheapest among these sin stocks with its highest dividend yield. It trades at 13x PER which is only half of brewers’ valuation while BJTOTO offers >6% yield against the rest at >3%. As such, BJTOTO can be a sector catch-up play.

Source: Rakuten Research - 8 Apr 2019