Berjaya Sports Toto (BToto) reported a FY16 net profit of RM306.2m, down 15.3% YoY. The results were broadly in line with expectations. FY16 revenue rose 5.3% mainly due to higher contribution from Philippine Gaming Management Corporation (PGMC) and HR Owen. However, net profit was lower due to weaker operating performance for its gaming business, particularly Sports Toto, which was affected by GST implementation and increasing illegal gaming activities. We cut our FY17-18F earnings forecasts by 5-7% to reflect lower gaming revenue per draw due to weaker consumer spending as well as competition from illegal operators. BToto proposed a fourth interim dividend of 5 sen, bringing total DPS for FY16 to 19 sen, translating to a payout of 83% (FY15: 80%). Since our downgrade on 21 March 2016, BToto’s share price has fallen by 16%. Our revised DCF-based target price of RM3.20 (from RM3.50 previously) suggests a potential upside of 10% while our dividend payout assumption of 83% indicates a 6% yield for FY17F. We believe the recent selldown has already priced in the overall weakness in the domestic number forecasting business. As such, we upgrade BToto to Outperform.

FY16 revenue +5.3% YoY. PGMC reported lower revenue due to lower lease rental income but with the favourable foreign exchange translation, the revenue in ringgit-terms was higher. Meanwhile, HR Owen, its motor dealership arm, reported an increase in revenue attributable to revenue contribution from additional outlets. Favourable foreign exchange effect has also enhanced sales performance for HR Owen. However, this was partially offset by a revenue drop of 1.6% for Sports Toto due to the GST impact and competition from illegal gaming operators.

Lower net profit on weaker contribution from Malaysia operations. Based on our estimates, prize payout in FY16 was higher at 62.4% compared to 62% in FY15. In addition, margin for its motor dealership business has fallen from 1.5% in FY15 to 1% in FY16. As a result, FY16 net profit dropped by 15.3% YoY. Meanwhile, 4Q16 net profit rose 35.1% YoY owing to lower prize payout and lower effective tax rate as it recognized unutilized tax losses by a foreign subsidiary.

Upgrade to Outperform on attractive dividend yield and valuations. As a result of the downward revision in our earnings forecasts, our DCF-based target price is revised down from RM3.50 to RM3.20. We maintain our dividend payout assumption at 83%, which translates to an attractive yield of 6% for FY17F. In our view, BToto’s share price looks bottomed-out and is trading at an undemanding forward PER of 13x. The current market price of RM2.90 is the lowest since August 2004.

Source: PublicInvest Research - 21 Jun 2016