Sigh of relief for BJToto

Berjaya Sports Toto Bhd
(Dec 8, RM4.25)
Maintain buy at RM4.25 with revised target price of RM4.86 (from RM4.50): Number forecast operators (NFO), including BJToto, hve received approval from the Ministry of Finance to revise the special prizes for the 4D Big game from RM200 per RM1 bet to RM180 per RM1 bet. The special prizes in the 4D Big permutation games have also been proportionally revised downwards.

The industry has been lobbying hard to pass on the recent two-percentage point (ppt) hike in pool betting duties to punters via the reduction of non-first, second and third prize payouts for its 4D games. This form of limited prize payout reduction restores margins without placing excessive pressure on revenue due to cannibalisation by illegal operators, which would have been more intense if the more lucrative first and second prize payout structure were to be reduced.

As there are 10 different variances of 4D numbers entitled to the special prize payouts (higher odds to strike) against just one for the first prize payout, the effect on the overall 4D theoretical prize payout ratio from the reduction of just RM20 in special prize payouts from RM200 to RM180 is equivalent to a RM200 reduction in the first prize payout structure from RM2,500 to RM2,300. The incremental reduction of just RM20 in special prize payouts is unlikely to deter punters from switching to the illegal operators in a meaningful way with most punters very much focused on the more lucrative top three prizes where the payout structure has remained intact.
The reduction in special prize payouts would result in a two ppts reduction in the group’s 4D theoretical prize payout from 66% to 64%. However, as only 75% of the group’s gaming business is derived from the 4D operation, the overall impact on the group’s blended theoretical prize payout ratio is estimated to be a reduction of 1.5 ppts.

Apart from the lower prize payout ratio, we have also assumed that the lower special prize payouts will have a 1% reduction in sales growth, but this is more than offset by a 1.5 ppts decrease in theoretical prize payout ratio. Consequently, we have raised our FY2011 and FY2012 earnings by 3.2% and 8.1% respectively. As the revision in the new prize payout structure will only take effect on Dec 15, the impact on FY2011 earnings is only a 4.5-month contribution against a full-year impact on FY2012 earnings.

We are only forecasting 2.1% revenue growth for FY2012, where the higher prize payouts coupled with the mature industry dynamics are unlikely to translate into exciting medium-term growth. That said, despite the reduction in special prize draw payouts, the industry should still be able to eke out marginal growth as long as GDP continues to expand above the 4% level. During the last pool betting hike in 1999, with industry players passing on the cost to punters via a RM200 decrease in the 4D first prize payouts, industry revenue contracted by 2% to 3%. Given the stronger economic growth that we are currently experiencing, coupled with the smaller incremental reduction in special draw prize payouts against first prize payouts in 1999, we believe that low single-digit industry growth is sustainable.

Following our earnings upgrades, while retaining our dividend payout ratio assumptions of 95% and 90% respectively for FY2011 and FY2012, we are raising our discount dividend model-derived target price from RM4.50 to RM4.86 and hence maintain our buy recommendation as the stock’s current gross dividend yield of 8% is still one of the highest among stocks under our coverage. — OSK Investment Research, Dec 8