BToto BUY Target Price RM4.98 by Hong Leong IB

Berjaya Sports Toto Target Price RM4.98 with a BUY Rating by Hong Leong Investment Banking.

Highlights
 Since BToto launched its new game variant known as 4D Jackpot on 9 June 2011, its sales per draw have been growing rapidly. It recorded a sales of RM982k on its first draw, 35% higher compared to Magnum’s first sales per draw of RM725k. Average is now RM1.6m per draw
 Our regression study and analysis suggest that there will be cannibalization on lotto and existing 4D games (but no impact on Magnum 4D Jackpot). However, the impact is marginal (circa RM200k per draw on lotto games).
 Hence, we believe that 4D Jackpot has created a “new” market segment on its own and will result in elevated sales level.
 With assumption of RM1.3m sales per draw under 4D Jackpot, revenue will increase by an additional RM224.9m or equivalent to 6.1% extra growth.
 Drawing from Magnum 4D Jackpot experience, BToto 4D Jackpot sales per draw is expected to stabilize after 6 months and expand at faster rate than existing games.
 The above expected change in overall sales mix (or reduction in 4D contribution) is expected to reduce group theoretical prize payout ratio given 4D Jackpot fixed payout of 55% vs. 4D’s variable 64.5%. This will result in elevated but more stabilized profitability and dividend payout.


Catalysts  Additional new sales to boost overall earnings and dividend
 Reducing prize payout implies more stable earnings and dividend as well as reduced “hostage” to 4D luck factor.

Risks  Higher-than-expected prize payout ratio.
 Pan Malaysia Pools may launch its own 4D Jackpot.
 Hike in gaming tax and/or pool betting duty.

Forecasts  We are assuming sales growth of 8.6% and 3.6% for FY12 and FY13 . With additional savings for prize payout, we expect FY12 and FY13 EPS to grow at 14.9% and 4.3% yoy
respectively.

Rating  BUY
 Positives - (1) Strong sales in its newly launched 4D
Jackpot; (2) Only NFO who provides lotto games; and (3)
Highest-yielding stock in the sector.
 Negatives – (1) Highly regulated industry; and (2) Prize
payout highly dependable on luck factor.

Valuation  Initiating with a BUY recommendation and TP of RM4.98 based on Discounted Cash Flow (DCF) model with WACC of 8.81% and long-term growth of 2.5%.