BJ Toto’s 1HFY16 (Apr) core earnings of MYR143.1m fell belowexpectations due to unfavorable prize payout in 2QFY16. The group,however, declared a second interim DPS of 5.0 sen, bringing its 1HFY16 payout to a generous 9.7 sen. Maintain NEUTRAL with our TP trimmed to MYR3.06 (from MYR3.22, 2% upside) following our earnings revision.

Results review. 1HFY16 core earnings of MYR143.1m fell below expectations, at 44.2%/41.5% of our/consensus full-year estimates. This was despite higher average jackpot prizes (MYR15.2m for its classic 4D game vs MYR7.4m in 1HFY15) as overall prize payout ratios climbed by an estimated 100bps to 63.0% for the period.

Dividend. On the flip side, management declared a second interim DPS of 5.0 sen, which translates into a payout ratio of 95.1% for the quarter. 1HFY16 DPS now total 9.7 sen (after factoring in the 1-for-140 treasury shares distribution announced in Sep 2015), at an annualised yield of 6.5%. We deem this in line with our annual dividend yield forecasts of 6.4-6.5% for FY16-18, pegged at a payout ratio of 85%.

Forecasts revised. We trim our FY16-18 EPS by 6.1-8.2% by factoring in higher prize payout ratios going forward, to be in line with its 1HFY16 showing.

Risks. Key risks include potentially slower ticket sales as consumers tighten their belts on top of continued rampant competition from illegal number forecast operators (NFOs) and potential revisions in gaming taxes.

Maintain NEUTRAL. All in, we maintain our NEUTRAL call with our DCF-based TP revised to MYR3.06 following our earnings revision. Although growth of the NFO industry is unlikely to be exciting over the medium term, we continue to see BJ Toto as a decent dividend play –which may appeal to yield-seeking investors.