Berjaya Sports Toto - Highest yield in the sector

Target RM4.57 (Stock Rating: ADD)

Berjaya Sports Toto's (BST) 3QFY14 core EPS was within our expectations. 9MFY14 core net profit was also in line, at 78% of our full-year forecast. We expect a weaker 4QFY14, given the absence of 3QFY14 festivities (Christmas, calendar and lunar new years). We cut our FY04/16 EPS by 7% and our DDM-based target price, as we assume that BST will absorb the 6% GST (in line with our Magnum assumption). The key catalyst is BST's 100% dividend payout. BST's 7% dividend yield is more attractive than Magnum's 6% and we are positive on the likely spin off of Sports Toto Malaysia (STM) into a trust which we believe will allow BST shareholders to migrate into a more favourable trust structure. Our Add rating is maintained.

Flat growth at STM 

STM's 3QFY14 revenue was flat yoy at RM875m as expected but its pretax profit fell by 2.8% to RM151m because of the normalisation of the average blended prize payout to 62.5%, above the estimated rate of 61.8% in 2QFY14. We expect BST to register 3% topline growth and 4.7% EPS growth in FY04/15 as we think that STM's recovery from the industry-wide revenue slowdown due to the higher cost of living will be faster than its peers. STM has an advantage in lottery games (25% of its 9MFY14 revenue) that are popular with the higher disposable income white-collar segment. We expect a 3% yoy contraction in FY04/16 EPS as we assume that the industry will not be successful in lobbying to offset the impact of the GST against the gaming tax. 

STM expected to be spun off into a trust 

We believe BST shareholders could migrate into a trust structure if STM is spun off into a trust by end CY14. Meanwhile BST's 75%-owned Berjaya Philippines (BPI) listed unit continues to diversify into other businesses but could be decoupled from BST later on, in our view. BPI has made a RM129m general offer for the luxury car distributor HR Owen UK and is subscribing to shares in shell company RBW Holdings, with the intention of investing in real estate in the UK. 

7% dividend yield to support valuations 

3QFY14 DPS of 9.5 sen was in line with our estimate. We expect total DPS of 29 sen in FY04/15, implying a minimum 100% dividend payout. This supports our forecast 7% dividend yield, the highest in our regional gaming coverage.