Due to the change in its financial year end to June 30, Berjaya Sports Toto (BToto) reported a 2-month (May and June 2019) net loss of RM41.4m, mainly due to impairment of goodwill and disposal of assets in relation to the leasing of lottery equipment business in the Philippines amounting to RM78.4m. Stripping out this one off item, BToto’s core net profit would have been RM37m. For cumulative 14-month FY19, BToto delivered a core net profit of RM313.4m. We make no changes to our earnings forecasts. However, we note that its current leasing contract in the Philippines will be expiring this month and we understand that management is seeking an extension pending the finalization of the 5-year concession award. Should PGMC fail to get the new concession, there is a 10% downside risk to our earnings forecasts. Nevertheless, this is not expected to affect the group’s dividend as it is predominantly dependent on the cash flow from its Malaysian operations. Given that its share price has surpassed our DCF valuation of RM2.30, we cut our rating to Underperform. No interim dividend was declared for the current 2-month period ended 30 June 2019.

• 2-month results dragged by impairment. The group reported a revenue of RM974.9m with a net loss of RM41.4m. Revenue was mainly contributed by ticket sales from the NFO business in Malaysia and also from the auto retailing business in the UK. It registered a net loss mainly due to impairment of goodwill and assets disposal in the Philippines amounting to RM78.4m. This was owing to the sale of a 60% stake in Philippine Gaming Management Corp (PGMC), which involves in the provision of lottery systems to the Philippines Charity Sweepstakes Office (PCSO). The group effectively owns a 40% stake in PGMC now but is likely to consolidate the Philippines business as BToto retains management control over PGMC’s business direction and strategy.

• Lottery business in the Philippines. BST’s 88.3%-owned subsidiary, Berjaya Philippines Inc (BPI owns a 40% stake in PGMC), was one of the two bidders who submitted bids for the 5-year lease of the PCSO Lottery System. Last month, BPI was declared the only eligible bidder subject to evaluation and approval by the PCSO. Although this 5-year lease covers Luzon, Visayas and Mindanao (while its current lease only covers Luzon region), we believe the new rental rates are likely to be lower. BPI’s current leasing contract is expiring this month and should it fail to get the new concession in the Philippines, there is a 10% downside risk to our earnings forecasts. Nevertheless, this is not expected to affect the group’s dividend as it is predominantly dependent on the cash flow from Malaysian operations.

Source: PublicInvest Research - 20 Aug 2019