Berjaya Sports Toto : Hit by higher operating expenses HOLD

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Berjaya Sports Toto : Hit by higher operating expenses  HOLD

Maintain HOLD on Berjaya Sports Toto Bhd (BST) with an unchanged DCF-based fair value of RM3.35/share. BST’s 1QFY17 results were below our expectations and consensus estimates due to a higher effective tax rate and a loss of RM16.1mil in the "others" division. In spite of this, we are keeping BST's FY17F earnings forecast for now. Effective tax rate was a high 36.3% in 1QFY17 as certain expenses were not allowed to be tax-deductible. According to BToto's annual report, the "others" division consists of property investment and development and hotel operations. We are unsure if the foreign exchange losses of RM9mil were included in the division. Excluding the forex losses, BToto's net profit would have declined by a smaller 6.6% YoY in 1QFY17. BST declared a gross cash DPS of 4 sen in 1QFY17 compared with 5 sen in 1QFY16. BST's gross DPS of 5 sen in 1QFY16 consisted of a share dividend of 2.5 sen and a cash dividend of 2.5 sen. BST's net profit declined by 18.9% YoY to RM58.7mil in 1QFY17 as the "others" division swung from a profit of RM2.8mil in 1QFY16 to a loss of RM16.1mil and the motor dealership unit recorded smaller earnings. Gaming profits improved by 7.5% YoY in 1QFY17 underpinned by a lower prize payout ratio.

The motor dealership unit's operating profit eased by 26.6% from RM13.0mil in 1QFY16 to RM9.5mil in 1QFY17 dragged by higher operating expenses. This was in spite of a 17.5% YoY increase in turnover in 1QFY17, which was driven by higher sales volume. Gross ticket sales per draw inched up by 3.6% YoY to an estimated RM17.5mil in 1QFY17 underpinned mainly by the 4D Jackpot game. There were 43 draws each in 1QFY17 and 1QFY16. Comparing 1QFY17 against 4QFY16, ticket sales per draw eased by 1.7%. There were 43 draws in 1QFY17 compared with 45 draws in 4QFY16. We do not expect earnings from BToto's Vietnam lottery venture to be significant as BST's effective stake is only 10.2%. BST's gross borrowings declined from RM831mil as at end-April to RM785.6mil as at end-July as BST repaid borrowings of RM60.3mil in 1QFY17. 

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