Upgraded to outperform at RM4.28 with revised fair value of RM5.10 (from RM4.50): In a surprise move, BToto last Saturday launched a new game called 4D Jackpot, which is a combination of a 4D game and a jackpot game, a very similar game to Magnum's 4D Jackpot, which has been performing extremely well since its launch in September 2009. This brings the total number of games BToto has to seven from six. BToto's 4D Jackpot game has five prize categories, with a minimum win of RM2 million for the first prize and RM100,000 for the second prize. The theoretical prize payout ratio (PPR) is 55%, same as its other lotto games.
Of the 55% prize pool, 55% (plus the upfront RM2 million and any snowballed amount) goes to the first prize, while 10% (plus any snowballed amount) goes to the second prize. As such, the actual payout for the first prize would be 30.25% and for the second prize 5.5%. We estimate the odds for the first prize are one in 16.67 million and for the second prize, one in 1.67 million, which is the same as Magnum's 4D Jackpot game. This game also has a cascading feature where if the Jackpot 1 prize is not won and the jackpot amount is RM30 million and above, then the Jackpot 1 prize money of any amount exceeding RM20 million shall cascade and be added to the Jackpot 2 prize money for the particular draw.
We believe this is a positive development for BToto given its languishing sales ever since Magnum's new 4D jackpot game was launched. We believe this game could give Magnum a run for its money and boost BToto's sales and profit quite substantially, particularly since this is not a replacement game for any existing games but a new game entirely. As a guide, Magnum's gaming revenue rose by 9.3% year-on-year (or RM281.5 million), while gaming profit before tax (PBT) rose by 55.3% (or RM135.8 million) in FY12/10, which was largely attributed to its new 4D jackpot game. As the market is already used to the mechanics of this type of game, it should take off quite easily while any cannibalisation of its existing 4D sales is not expected to be significant, as was the case with Magnum.
As for implications on the industry, this could mean that the government is now more open to liberalising the industry, and we would not be surprised if Pan Malaysian Pools (PMP) also gets to launch a similar game soon. This would then be a game changer for whoever the new buyers of PMP are (said to be a consortium of companies including the Genting group), as valuations would have to take this possibility into account.
Risks: 1) Poor luck factor; 2) Regulatory changes for the numbers forecast operator (NFO) industry to discourage gambling in the country or to allow competitors more outlets and more game variations; and 3) Hike in gaming taxes.
Our FY04/12-13 forecasts have been raised by 2.2% to 4.9%, but FY04/11 is unchanged. Post-earnings revision, our discounted cash flow-based fair value is raised to RM5.10 (from RM4.50). We raise our recommendation on the stock to 'outperform' (from market perform), as we believe this could be a catalyst for BToto, given the exciting potential and earnings prospects of this new game. ' RHB Research, June 13
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