BST shares came under some selling pressure when it  cancelled plans to  list  its Malaysia  NFO  division in Singapore. Nonetheless,  the stock is still  a  BUY,  as  its  appealing  6.6-6.9%  annual  yield  makes  it  the  most attractive dividend play under our gaming coverage. Our DCF-based FV now  stands  at  MYR4.46  (from  MYR5.01)  following  a  revision  in  ourearnings forecasts and WACC assumptions.

• Leader in NFO segment.  BST commands an estimated 41%  share of the number forecasts operators (NFO) market, vis-à-vis Magnum’s (MAG MK, NEUTRAL, FV:    MYR3.41) 35%  share.  We believe its niche  as  the only  NFO  offering  lotto  games  puts  BST  in  a  position  of  strength compared  with  other  NFOs,  whose  traditional  4D  games  are  facing competition from illegal operators.
• Blessing  in  disguise.  The  company’s move  to  call off plans  to  list  its Malaysia  NFO  operation  in  Singapore  may  have  been  a  blessing  in disguise, as the proposal would eventually have diluted BST’s interest in the  latter  to  28.7%  (from  100%),  which  would  then  subject  BST  to  a holding company discount due to loss of a directly-owned business.
• Earnings  to  normalise  in  2HFY14.  BST’s  1HFY14  core  net  profit  of MYR177.7m  was  below  estimates,  as  88%-owned  Berjaya  Philippines’(BCOR PM, NR) contributions weakened due to competition from Pacific Online  Systems  (LOTO  PM,  NR).  We  understand  that  LOTO  currently has  about  900  lottery  terminals  in  Luzon  compared  with  BCOR’s estimated 5,000. To counter this, BST is looking to increase its presence by deploying 700 terminals over the next 3-6 months. This move prompts us to  cut our  EPS  forecasts by 6.7% for FY14F and 7.7% for FY15F  to incorporate  higher opex,  while,  at the same time,  introduce our FY16F forecasts.
• Maintain BUY.  We maintain our  BUY  call  on BST  for  its  still-appealing 6.6-6.9% annual yield,  which makes  it the most attractive dividend play under our gaming coverage. Our DCF-based FV now stands at MYR4.46 (from  MYR5.01)  following  a  revision  in  our  earnings  estimates  and WACC  assumption  to 8.5%  (from 7.4%)  to align with  MAG’s,  as well as incorporate a more realistic terminal growth rate of 1.3% (from 2.0%).

Financial Exhibits

SWOT Analysis

• Largest NFO in Malaysia with a monopoly in lotto games

Company Profile
BJ Toto (BST) is one of the largest NFO operators in Malaysia. It also has a presence in the Philippines gaming market.

Recommendation Chart

Source: RHB