This article first appeared in The Edge Financial Daily on December 20, 2017 - December 26, 2017

Berjaya Sports Toto Bhd 
(Dec 19, RM2.25)
Maintain hold rating with a lifted target price (TP) of RM2.35 per share: We are maintaining our “hold” call on Berjaya Sports Toto Bhd (BToto), with a slightly higher TP of RM2.35 as we roll over our dividend discount model (DDM) valuation base to financial year 2019 estimate (FY19E). We also lift our earnings per share (EPS) by 3% over FY18 to FY20E, as core net profit at RM131.3 million (-9.3% year-on-year [y-o-y]) in first half of FY18 (1HFY18) is tracking above our going in forecast, but is within consensus estimates. Although the Malaysia Toto operations have shown signs of improvement, we still believe that the low prize payout structure puts legal number forecast operators like BToto at a disadvantage to the illegal operators. 

Second quarter FY18 (2QFY18) BToto revenue delivered decent growth of 4.4% y-o-y and 6.2% q-o-q, driven by higher sales from its jackpot games due to the record high jackpot pool coupled with an overall higher number of draws during the quarter. Although the high prize pool from the jackpot games managed to bring in more sales, we don’t think BToto is out of the woods just yet, as the traditional four-digit games which used to contribute around 70% of its sales, are still facing stiff competition from the illegal operators. 

Despite a stronger revenue growth of 2.7% y-o-y for 1HFY18, the segment’s profit before tax (PBT) was still down by 12.3% y-o-y due to higher operating expenses incurred during the 1QFY18. As we are of the view that the Philippines Gaming Management Corp is still trying to lower its current operating lease payments to Philippine Charity Sweepstakes Office (PCSO) (entity owned by BToto), the profitability of the segment could deteriorate further. 

Overall performance for the segment has normalised in 2QFY18, after a relatively strong performance during 1QFY18. PBT for the segment in 1HFY18 was down by 4.3% y-o-y, due to the softer sales demand. The volatility in the performance is due to the timing of new car launches. 

We maintain our “hold” and lift our DDM-based 12-month TP to RM2.35 (discount rate: 8%; growth rate: 1%), from RM2.20, as we roll over our basis to FY19E (from FY18E). We believe BToto’s earnings growth will be challenged by a lower payout structure relative to illegal shops, and weak results at PCSO. Upside risk: lower-than-expected prize payout. — Affin Hwang Investment Bank Research, Dec 19