BJToto - MARKETPERFORM - Eyeing a stake in Philippine NFO?

Stock Name: BJTOTO
Company Name: BERJAYA SPORTS TOTO BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 4.52

It was reported over the weekendthat BToto is eyeing a stake in a Philippine NFO. We see this potentialoffshore expansion to broaden its earnings base as a positive move, if theacquisition materialises, given its current less exciting domestic growth. We have estimated the top line to growonly 4% annually over the next two years as the local NFO market matured. Atthis juncture, we are unable to confirm the news and quantify the exactfinancial impact to BToto given the limited information obtained. In themeantime, we continue to maintain our MARKET PERFORM call on the stock with anunchanged DCF-derived TP of RM4.52/share. 

Eyeing stake in Philippine NFO. It was reported in The Edge Weekly that Berjaya Sports Toto Bhd (BToto)is looking to expand its operations in the Philippines by potentially acquiringa stake in the Philippines Charity Sweepstakes Office (PCSO).  However, we are unable to confirm the news atthis juncture. We are positive on the news (if it materialises) as an offshoreexpansion is the way to broaden the company's earnings base given the limitedgrowth prospects locally. However, previous failed cases of overseas venture byits local peers, namely Magnum Corp (in Bali) and Tanjong plc (in Moscow), indicate that local NFOs'  overseas venture may not be easy. 

PCSO is a state-owned charity organisation.  PCSO is the principal government agency inPhilippines set up with the aim of raising and providing funds for health programs,medical assistance and services, and charities of national character.  The main products of PCSO are sweepstakes andthe lottery games. It currently has 3,232 terminals across 2,600 outlets inLuzon island. PCSO is actually not new to BToto as its subsidiary, Berjaya PhilippinesInc (BPI) supplies and maintains a computerised online lottery system andprovides software support to PCSO.

30% fund channel for charity. In accordance with the company's Charter, PCSO specifically allocatesits  net receipts or revenues in thefollowing manner i.e. 55% to a Prize Fund, 30% to a Charity Fund and 15% to anOperating Fund. Each allocation has its own specific purpose and usage, andhence any diversion or inter-fund transfers are illegal and in violation of thePCSO Charter. Given so, in our opinion, PCSO needs to amend its Charter if it wereto privatise from a charity organisation to a profit-oriented company. We are however unable to ascertain the earningsand market size of PCSO from its currently publicly available information (suchas from its website -  www.pcso.gov.ph). Consequently,we are not able to estimate the potential financial impact on BToto yet at thisjuncture (if the deal materialises).  

MARKET PERFORM rating maintained. We reckon that BToto's localmarket is fairly matured with limited growth prospects. Thus, an overseasexpansion is the way to broaden its earnings base. Although we have a MARKETPERFORM call on BToto, we reckon that income seeking investors may still likethe stock for its sustainable and attractive 7%-8% gross dividend yield. Ourprice target of RM4.52/share is based on DCF valuation where we assumed a WACCof 7.4%. 

Source: Kenanga