Key takeaways from recent analyst briefing: 1. Budget 2020 is expected to be a non-event for NFO; 2. The leasing of lottery system in the Philippines will continue for next 12 months; and 3. H.R. Owen is for sale. We remain skeptical on the outlook for NFO operations on the back of proliferation of black market operations as well as illegal online casino/sport betting. Maintain Sell on BJToto with unchanged target price of RM2.29/share.

Budget 2020

Management expects the upcoming Budget 2020 to be a non-event. After the industry was slapped with a reduction in special draw by half in Budget 2019, the company does not expect another round of harsh measure this year. Also, it has never happened before that the number forecasting operations (NFO) were hit by 2 punitive measures back-to-back. Having said that, we also do not expect those cancelled special draw will be reinstated in Budget 2020.

Leasing of lottery equipment extended for a year

With regards to the faith of Berjaya Philippines, Inc (BPI), a 88.3%-owned subsidiary, in extending its leasing of lottery equipment services in the Philippines, management guided that the hope is completely vanished upon disqualification by authority. However, the authority has recently extended the lease agreement for one year until Aug-2020. Recall, BPI won a concession to supply lottery equipment in Luzon Island, Philippines, back in 1993, which has expired on 21 Aug 2019. Instead of extending the concession, the Philippines Gaming authority has called for a tender, which has attracted 8-9 participants. According to management, the tender has failed to achieve any outcome as most of the participants did not submit bids at the end. Meanwhile, the two successful bids, one from BPI, were later disqualified. As such, without a winning bid, BPI is tasked to continue with the services until a new operator emerges. As far as financial impact is concerned, management indicated that there will be no additional capex incurred to extend the services. Also, the group has fully impaired the investment related to the leasing of lottery equipement business in the Philippines.

H.R. Owen is for sale

According to management, the car franchising business in London, H.R. Owen, is for sale. However, in our opinion, it is may not be easy to find an interested party amid the threat of Brexit. Also, considering the group’s total investments in H.R.Owen of approximately GBP100mn and the relatively thin trading margin (1-3%), the disposal may seen impossible without a significant discount.

Forecast

No change to our FY20-21 earnings projections.

Valuation

We remain skeptical on the outlook for NFO business on the back of proliferation of black market operations as we as illegal online casino and sport betting. We observe that online casino/sport betting activities are so rampant nowadays particularly to young customers and this structural change would likely dampen long-term profitability of NFO players in Malaysia. As such, we maintain Sell on BJToto with unchanged DDM-valuation of RM2.29/share.

Source: TA Research - 3 Sept 2019