Berjaya Sports Toto - New trajectory of growth with new Power Toto 6/55 game

Berjaya Sports Toto (BToto) will go ex-dividend and treasury share distribution (1:14) on 13 Jul 09. Dividend payment and share transfer will be made on 27 Jul 09. In addition, the new Power Toto 6/55 game, which replaces the existing Toto 6/42 Jackpot game, will be launched in Nov 09. All the necessary approvals have been obtained from the Ministry of Finance (MOF).

Power Toto 6/55 lotto game to power tickets sales. The new lotto game will have a much larger matrix (three additional numbers), it guarantees a larger upfront jackpot of RM3m and has no limit on jackpots vs RM2m upfront and a maximum jackpot of RM30m for Mega Toto 6/52. Drawing on the experience with the Mega Toto 6/52 game which raised revenue by about 5%, the new lotto game is expected to raise gross turnover per draw by 1-3% and earnings by 2-4% for FY10-12, after factoring in some cannibalisation on existing games.

Utilisation of 12 special draws by Dec 09. Management plans to utilise all 12 special draws by Dec 09, leaving 4QFY10 without any special draws pending new approval by MOF. There will be three, five and four special draws in 1QFY10, 2QFY10 and 3QFY10 respectively, giving 9MFY10 five additional draws over 9MFY09. 2HFY10 will benefit from the new Power Toto 6/55 game.

Parent well equipped for potential RM900m bond redemption by bondholders. By 16 Jul 09, exchangeable bondholders of Berjaya Land (BLand) would have decided on whether they would exercise their put option. Recall that we have estimated that less than 50% of the bondholders would exercise the put option given the bond’s attractive 8% yield. Backed by cash in hand (RM558m), upcoming BToto dividends and recent placement of 40m BToto shares at RM4.75/share (raising RM369m), BLand will have sufficient funds to redeem the bonds. The 40m BToto share placement is slightly below BToto’s entitled shares (42.6m shares) under the treasury share distribution (1:14).

Bumper dividend payout is unlikely in near term. BToto has front-loaded 72% (adjusted to enlarged share base) of FY10’s prospective gross dividend (33 sen), leaving only an outstanding 9 sen/share to be paid in the next 12 months. This prospective dividend payout meets the minimal dividend policy of a 75% net payout ratio. Assuming 100% payout, there is an increment of 10.5 sen. We believe a bumper dividend payout in the near term is very unlikely. Nevertheless, beyond FY10, effective dividend yield would be sustained at an attractive 7-8% gross, post ex-dividend and treasury share distribution.

Raising FY10-12 earnings forecasts by 2-4%. We expect the new lotto game to attract more punters and generate higher tickets sales given its attractive prize payouts and unlimited jackpots, although there is potential of cannibalisation of its existing game especially the Mega Toto 6/52. Thus, we conservatively revise upward our forecasts for gross turnover per draw marginally by 1-3% and subsequently raise our earnings forecast by 2-4% for FY10-12. The upside potential of 12 special draws has been imputed in a previous earnings revision. Given these two positive drivers (new Power Toto game and 12 special draws), net earnings growth of 7.4% yoy for FY10 is within reach.

Maintain BUY. Based on DCF (cost of equity of 8.9% and terminal growth of 1%), we value BToto at RM4.90/share post-dividend and treasury share distribution (total entitlements worth 60 sen/share). Btoto’s share price still has 11% upside potential and its future earnings growth will be underpinned by the new Power Toto 6/55 game which is expected to attract more punters.