Berjaya Sports Toto - 1QFY10 results preview: Likely to be lifted by special draws

The seasonally weak first quarter results are likely to be lifted by the utilisation of three special draws during 1QFY10. We expect revenue and net earnings to rise 8-9% and 12-14% yoy respectively. Maintain BUY. Target price: RM4.90.


Berjaya Sports Toto (BToto) will report its 1QFY10 results in the second week of Sep 09. We expect net earnings to grow 8-9% yoy but to come in flattish qoq as the positive impact from three additional special draws utilised in 1QFY10 will kick in. No dividend is expected in 1Q10.

Positive impact of three additional special draws will kick in. BToto is expected to have 42 draws in 1QFY10 vs 39 draws in 1QFY09 and 40 draws in 4QFY09. Of the 42 draws, three will be special draws (one common draw and two standalone draws) vs none in 1QFY09. Gross revenue per draw is expected to have risen at low single digits yoy but should be flattish qoq backed by the resilient blue-collar segment. Hence, we expect its revenue and net earnings to rise 8-9% and 12-14% yoy respectively, during the seasonally weak first quarter. The luck factor will potentially drive net earnings higher.

No dividends expected in 1QFY10. We do not expect BToto to declare any dividends in 1Q10 as it has front-loaded its FY10 dividend payout (net: 19 sen) in 4QFY09. Parent company BLand’s projects in Vietnam and South Korea are expected to take off in 2010, and we believe these are probably the best indicators of the period around which BLand’s future cash needs will arise. Going forward, using historical records as a gauge, we do not discount the possibility that BToto may increase its payout beyond the current level of 75%, subject to its distributable reserves. Assuming a 100% payout, there will be an incremental 10.5sen DPS, on top of an outstanding 9.4sen/share (based on our FY10 gross DPS forecast of 33sen).

Positive outlook safeguarded by the upcoming Power Toto 6/55 game. BToto is on track to launch its Power Toto 6/55 game in Nov-Dec 09 to replace the existing Toto 6/42 game. The new game, which guarantees a larger upfront jackpot of RM3m and has no cap on jackpots, could potentially raise gross revenue per draw by 1-3%, even after imputing some cannibalisation of existing games.

Although its monopoly on jackpot games will end once Magnum launches its 4D game with a jackpot element (no launch date has been announced yet), we think the impact on BToto’s revenue will be marginal, given its extensive outlet network (681 outlets, the largest among the three number forecast operators (NFO)) and higher number of jackpot game variants offered (six). Instead, we believe the NFO market as a whole will grow, based on past observations.

Maintain BUY. Based on DCF valuation (cost of equity of 8.9% and terminal growth of 1%), we value BToto at RM4.90/share which implies prospective FY10 and FY11 PE of 15.0x and 14.4x respectively. We like the stock as a defensive play and dividend yields should remain attractive at 7-8% gross beyond FY10.