Results Review

• Berjaya Sports Toto’s (BJToto) 1QFY20 core profit accounted for 17.5% of our full-year forecast and 20.9% of consensus estimates. We consider this as within expectations after taking into consideration that ticket sales tend to be seasonally strong during Chinese New Year in January or February.

• For comparison purpose, due to a change in financial year, we adjust 1Q and 4QFY19 earnings by blending previous year results ended April (see Table 3) to eliminate timing difference. Overall, BJToto’s 1QFY20 core earnings declined by 22.6% YoY due to 1) lesser draws of 42 times in 1QFY20 versus 46 times in the same period last year with 1 reduction in normal draw and 3 in special draw. 2) margin contraction in the car franchising segment as 1QFY19 earnings were boosted by the launch of new models with high margins.

• In terms of balance sheet quality, 1QFY20 net gearing escalated to 0.96x (vs 0.87x as at Oct-18). However, the group has managed to refinance its short-term debts with long-term financing, resulting in improvement in current ratio to 1.3x (vs 0.8x as at Oct-18).

• For this quarter, BJToto declared a first interim dividend of 4sen/share, similar to 2QFY19 ended Oct-18. This is in line with our dividend projections of 16sen/share for FY20.

Impact

• No change to our FY20-21 earnings projections.

Outlook

• In our opinion, the stern penalties introduced in Budget 2020 against illegal gamblers, which comprised a higher minimum mandatory penalty of RM100,000 and a minimum mandatory jail sentence of 6 months, could effectively curb black market activities in the NFO industry in Malaysia. We believe the penalties are big enough to stop gamblers from taking unnecessary risks for additional prizes.

Valuation

• Maintain Buy with unchanged DDM-valuation of RM2.93/share based on unchanged discount rate of 10.6%.

Source: TA Research - 20 Nov 2019