BToto’s outlook isn’t as bad as perceived
Ng Wai Mun 

BERJAYA Sports Toto Bhd’s (BToto) share price hit a five-year low of RM2.25 on Aug 30, reflecting its recent performance. The group’s number forecast division also posted two consecutive quarters of losses in the latest two quarters.

The counter closed at RM2.32 on Nov 30.

Despite this, its outlook is not as bad as perceived. This is because the company’s overall revenue increased by 2.5% to RM1.47 bil while net profit rose by 26% to RM74 mil in Q1FY18, its latest reporting quarter.

Naysayers, however, point to the health of its number forecast operations (NFO) as an indicator of its future earnings potential. For Q4FY17, BToto’s wholly-owned subsidiary, Sports Toto Malaysia Sdn Bhd (Sports Toto), posted a 3.1% lower revenue. Its pre-tax profit declined 14.7% to RM380.2 mil.

For Q1FY18, Sports Toto’s revenue declined 4.3% from the preceding quarter. Despite this, the company posted a 20.8% increase in pre-tax profit, which it attributes to “higher prize payout and higher operating expenses incurred in the preceding quarter”.


Magnum’s share price also eases

BToto’s competitor, Magnum Bhd, also saw its share price ease during the year. Magnum’s 52-week low was RM1.67 on June 2. The shares closed at RM1.78 on Nov 30.

For BToto, toto betting and leasing of lottery equipment contributed about 56.9% of total revenue for FY17, while the motor dealership business accounted for about 41%.

Since toto betting is the main revenue earner, investors pay close attention to its performance. The company says the decline in revenue is mostly the result of having a smaller number of draws.

BToto has four main business segments, namely toto betting, leasing of online lottery equipment, distribution of computerised lottery systems and motor retailing.

Through Berjaya Philippines Inc (BPI), BToto owns Philippines Gaming Management Corporation, which supplies and maintains a computerised online lottery system and software. Through BPI, BToto also controls H.R. Owen, which has the dealership of several luxury marques like Rolls-Royce, Bentley, Lamborghini and Bugatti in the United Kingdom.

While the declining revenue is cause for concern, both investors and analysts are positive on BToto’s future outlook. 

According to Hong Leong Investment Bank, there were 43 draw days in Q1FY17 against 42 in Q1FY18. TA Securities Research puts the total number of draw days in Q4FY16 as 45 days in contrast to 44 days in Q4FY17.

“The recent (toto betting revenue) decline comes from two prongs. Firstly, there were a lower number of draw days in Q1FY18 (compared to the corresponding period in FY17). Q4FY17 also experienced a lower number of draw days. Looking at the sales on a per-draw-day basis instead, at the least sales have been sustained and are not on a decline,” a regional gaming analyst tells FocusM, explaining that although the difference is just a single day, it can impact the company significantly.

The regional analyst predicts that BToto’s revenue could suffer a further decline in FY18 due to fewer draw days. According to him, there were 182 draw days in FY17. However, based on his estimation, FY18 will have 178 draw days. Nevertheless, the impact of fewer draw days on BToto’s revenue could be compensated by just a small deviation in the total prize payout ratio in FY18.

“Some investors may still be unconvinced that the outlook is getting brighter. (Despite lower revenues), I read the flattish sales (per draw day) as being positive,” says the analyst.

BToto’s business works on a cash basis, hence it usually has a steady cash income. For FY17, net cash generated from its operating activities amounted to RM244.9 mil, which is a decrease of 62.4% from the FY16 figure of RM397.8 mil. Although its cash income is declining, BToto is stable with total cash and cash equivalents of RM384.1 mil for FY17.

The change in Q4FY17 sales was also due to the dates of the Chinese New Year holidays in 2016 and 2017. In 2017, Chinese New Year fell at the end of January, which was Q3FY17 for the company. In contrast, Chinese New Year 2016 fell in Q4FY16.

“In the run-up to the festive season, it is the norm for the company to experience a substantial surge in sales. It is not surprising to expect sales to be three to four times higher than for a normal period, the week before and after this festive period,” the regional analyst explains.


Toto games preferred?

The respective 4-digit and toto games have a regular group of punters. But there may be a gradual but permanent shift in punters’ preference for the toto games which offer more than just 4-digit number forecasts, with some punting when the prize money snowballs.

 “Previously, more punters go for the toto games as and when the (jackpot) prize snowballs,” says the regional analyst, adding the shift from 4-digit to toto betting may be permanent as the prizes are very attractive.   

Alliance DBS Research vice-president of investment research Cheah King Yoong, however, has a different view about the attractiveness of the 4-digit number games. “Despite the attractiveness of the toto games, such as large prize payout and low betting fees, we observe that the traditional 4-digit games continue to have a stable customer base. As such, we do not expect a substantial switch from the traditional 4-digit to toto games but rather a gradual switch,” says Cheah.


Threat from illegal operators

While the number forecast games feature a fluctuating revenue stream, their future earnings potential is also under threat from illegal operations.

Nevertheless, analysts say it will be tough for illegal operators to provide toto betting games, thus NFOs are able to continue with their operations.

Analysts say the threat of illegal operators should be mitigated by the fact that BToto is into toto games, while also providing the traditional 4-digit bets.

Maybank Investment Bank believes enforcement against illegal operators could bring an upside for the NFO players. 

Its gaming sector analyst Yin Shao Yang states that recent developments appear to suggest that the gaming industry revenue could be stabilising.

Although BToto’s gaming revenue was rather flat per draw, Magnum’s gaming revenue per draw grew by 1%, year on year, for the quarter ended June 30, 2017.

Maybank IB Research states with no tax penalty overhang and higher dividend yields, it prefers BToto over Magnum.

It also points out BToto’s dividend yields are the highest since 2006. Total dividends per share were 14 sen in FY17 and 19 sen in FY16.

Unlike the regional analyst and Maybank IB, which both have BToto as their pick in the gaming sector, Cheah has no preference between the two main NFOs in the country.

He explains that despite having hold recommendations for both, the sector’s prospects remain lacklustre.

Cheah is maintaining his target price of RM2.55 for BToto. 

This article first appeared in Focus Malaysia Issue 261.