Listed on the Malaysian Bursa and also traded over the US OTC markets (OTCPK:BJSAF), Berjaya Sports Toto (BToto) is a Malaysian company primarily engaged in toto betting, leasing of online lottery equipment, and the manufacture and distribution of computerized lottery and voting systems. As part of its diversification plans, BToto also operates a hotel in the Philippines and retails luxury motor brands in the UK.
Sports ToTo Malaysia (key subsidiary)
BToto’s key operating subsidiary, Sports Toto Malaysia, operates approximately 680 outlets throughout Malaysia, offering seven games namely Toto 4D, Toto 4D Jackpot, Toto 5D, Toto 6D, Power Toto 6/55, Supreme Toto 6/58 and Grand Toto 6/63. The subsidiary has three draws weekly. Sports Toto Malaysia has been consistently the market leader among all Number Forecast Operators (“NFO”) in the country (in terms of total revenue).
Berjaya Philippines (BPI)
BToto’s subsidiary BPI is an investment holding company based in the Philippines. Its key subsidiaries include Philippine Gaming Management Corporation (PGMC), UK Luxury Car Retailer H.R. Owen PLC (HRO) and Perdana Hotel Philippines (PHPI).
PGMC leases online lottery equipment and provides software support to the Philippine Charity Sweepstakes Office (“PCSO”), the government agency responsible for lotteries and sweepstakes, in Luzon. Revenue from equipment leasing as well as maintenance and repair services are recognized based on an agreed percentage of gross lottery ticket sales receipts. As at April 2016, PGMC had 4,569 lottery terminals installed in 4,263 outlets. PCSO and PGMC have enjoyed a strong working relationship and extended the equipment leasing agreement in August 2015 to August 2018.
PHPI operates the 223-rooms Berjaya Makati Hotel in Metro Manila. Berjaya Makati Hotel had operated previously as Best Western Astor Hotel and its name was changed after being acquired by PHPI in December 2010. We do not view its occupancy rate in the last few years favorably, with occupancy rates of only 65% and 61% in FY16 and FY15, respectively. Going forward, BToto has not announced any plans for PHPI but we would view any potential divestment of the unit favorably (assuming transaction terms are reasonable and fair).
HRO is a franchised luxury motor retailer in the UK. The company operates numerous vehicle dealerships and sells both used and new vehicles. It also engages in other operations, including vehicle maintenance, spare parts sales, chauffeuring and others. Outlets are found in London, Berkshire, Gloucestershire, Manchester and other parts of the UK, retailing top-tier luxury brands such as Ferrari, Maserati and Bugatti. Profitability of the unit remains low (compared to BToto’s other operations), with 1H17 EBIT margins of 1.4%.
International Lottery & Totalizator Systems (ILTS)
ILTS supplies lottery systems (including gaming system software and agent terminals) and provides after services (e.g. training, facilities management and maintenance support) to online lottery and pari-mutuel racing industries globally. With more than 30 years of experience, ILTS has supplied more than 65,000 wagering terminals for customers in more than 20 countries.
In addition, ILTS owns a voting business segment (Unisyn Voting Solutions (UVS), which develops and markets the OpenElect digital optical scan election system to election jurisdictions. Its products were used in the 2016 U.S. presidential election.
Rationale for our unflattering view
Core toto betting business in the Malaysia faces near-term headwinds, raising concerns on dividend sustainability
The rampant proliferation of illegal gaming across Malaysia poses significant challenges to the legal toto betting industry. Players within these illegal channels offer better payouts for their customers and also avail credit, all of which legal entities such as BToto and Magnum are unable to provide. As a result, the legal toto betting industry has been losing market share to their counterparts. It has been estimated that the illegal market is 1.0x to 1.5x the size of the legal industry, illustrating the challenges to BToto.
We have observed visible impacts on the leading toto betting companies:
- Magnum: 9M ending September 2016 gaming revenues and PBT fell by 3% and 23%, respectively
- BToto: 6M ending October 2016 toto revenues and PBT fell by 2% and 9%, respectively
Partially as a result of external threats, legal industry players have had to introduce new games and undertake new marketing campaigns to entice customers, intensifying intra-industry competition.
Key initiatives introduced by BToto’s key rival (Magnum):
- Launched off a new game (4D Powerball) in January 2016, offering its customers chances to win multi-million jackpots
- Nationwide campaign to promote and educate the public on Magnum’s games with product awareness walkabout teams
- Enhance Magnum 4D Mobile App, which allows customers to scan the QR code on their ticket to check if they won
We believe that sector headwinds could affect BToto’s dividend sustainability and note that quarterly dividend distributions have lagged brokers’ expectations for two consecutive quarters (Total of eight Malaysian Cents actual versus 10 Malaysian Cents expected).
HRO’s profit contribution remains too small to offset the declining toto betting business
Despite accounting for 42% of 1H17 revenues, profitability of the motor dealership segment only accounts for 8% of total operating profits (pre unallocated corporate expenses). In our view, segmental EBIT margins remain unattractive at 1.4% compared to BToto’s core operations.
Going forward, we believe that HRO’s plans to grow its presence would likely translate to higher marketing costs and CAPEX. In BToto’s 2016 annual report, it was reported that as part of HRO’s partnerships with top-tier brands, the firm had invested in more dealerships with showrooms and after-sales facilities to meet corporate identity standards as required by the brands it represents and to increase its throughput and sales turnover.
Initiatives observed include:
- Scaling up of luxury hire and chauffeur drive operations, from four cars to 25, and five staff to 15
- Opening of a Maserati after-sales in North West London
- Planned opening of a new Maserati showroom in Manchester in March 2017
Furthermore, various sources have pointed in the same direction that effects of higher inflation (stemming from the GBP slump) could affect consumer discretionary spending.
A Reuters poll suggested that consumer spending is expected to weaken as the strain of higher prices takes effect, following the GBP slump. Secondly, reports from the British Retail Consortium showed cash retail sales grew at the weakest pace for any November-to-January period since 2008/2009, when the UK economy was its low point after the GFC. Thirdly, the Confederation of British Industry’s retail sales balance for January suffered the sharpest one-month drop since records began in 1983, while a European Commission survey of the retail sector and official data for December also weakened.
Data from Google, Markit and European Commission have pointed to increasing concerns about inflation. The BRC survey and Kantar Worldpanel supermarket data also suggested UK consumers are now paying more for essential goods.
Taking the above into consideration, discretionary spending could potentially be adversely affected. Falling sales could further dilute HRO’s profitability, considering the rising operating expenses from enlarged operations as well as higher working capital requirements.
Potential headwinds from further declines in PCSO sales
PGMC’s revenue and PBT fell 12% and 20% YoY for 2QFY17. This was due to lower sales reported by the PCSO. Further sales declines could result in PCSO negotiating for lower leasing fees in 2018 when the current agreement expires, which will lower profits.
Events to be triggered for us to reevaluate BToto
We view BToto’s key attraction to be its >5% dividend yield, supported by operations which have strong cash flow generation ability. As discussed above, external threats from illegal gaming channels have been growing, cumulating in revenue headwinds for major players.
Moreover, intra-industry competition remains stiff, as players seek to introduce new gaming variants and undertake nationwide marketing campaigns to promote awareness for their products. This increases operating expenses and dilutes profitability of BToto’s operations.
Furthermore, HRO faces macro headwinds and EBIT margins are only 1.4%, which we do not view optimistically. We also struggle to see visible synergies between BToto’s various businesses and this has a considerable impact on the appeal of the firm’s equity story to us.
That said, BToto’s toto betting business remains its key revenue and profitability generator and is a proven cash cow. We would look to reconsider our analysis of the company once we observe a sustainable uptick in the toto betting industry or an intensified effort by the government to crack down on illegal gaming in Malaysia.
At its current share price of MYR2.96 (as of 17th February 2017), BToto trades at a 5.4% 1H17 annualized dividend yield. We do not view this as attractive, as we believe that the downside risks outweigh BToto’s rewards, considering BToto’s dividend generation ability could be affected adversely by heightened competition from the toto betting industry competitors to the external threats from the illegal betting sector. Consistent decreases in dividends announced may cause the firm’s share price to be adversely affected further. We would look to reconsider BToto should there be favorable industry developments such as crackdown on illegal gaming.
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