This article first appeared in The Edge Financial Daily on September 25, 2017 - October 1, 2017

Berjaya Sports Toto Bhd
(Sept 21, RM2.36)
Maintain hold with an unchanged target price of RM2.70: The group reported a core net profit of RM71 million (+5% year-on-year [y-o-y], 2% quarter-on-quarter [q-o-q]) in the first quarter of financial year 2018 (1QFY18). The higher core earnings were mainly due to: i) lower prize payout (the estimated prize payout ratio was 62.6% for the 1QFY18 versus 63% in 1QFY17); and ii)higher contributions from HR Owen plc.

We believe that the q-o-q comparison does not serve as a good gauge for the group given the highly seasonal nature of its gaming business.

Its 1Q core net profit formed 24% of our and consensus full-year estimates, which are within expectations.

The group declared a first interim dividend per share (DPS) of four sen, implying a 73% payout ratio, which is below our expectations of 80%.

The 1QFY18 gaming revenue for its key subsidiary, Sports Toto Malaysia, inched down 2.3% y-o-y, dragged by: i) weak consumer spending; and ii) increased competition from the illegal number forecasting operators (NFOs).

Other than marginal revisions to our earnings forecasts after incorporating its FY17 financial figures, we keep our earnings estimates and recommendation for the stock largely unchanged, pending the upcoming meeting with management.

We remain cautious on the stock given its challenging prospects. Other than the weak consumer sentiment, competition from illegal NFOs continues to weigh on the growth prospects of the sector.

We understand that competition from illegal NFOs have intensified since last year with some illegal NFOs willing to increase the prize payout up to 85%. — Alliance DBS Research, Sept 21