BJToto - MARKETPERFORM - Eyeing a stake in Philippine NFO?

It was reported over the weekend that BToto is eyeing a stake in a Philippine NFO. We see this potential offshore expansion to broaden its earnings base as a positive move, if the acquisition materialises, given its current  less exciting domestic growth. We have estimated the top line to grow only 4% annually over the next two years as the local NFO market matured. At this juncture, we are unable to confirm the news and quantify the exact financial impact to BToto given the limited information obtained. In the meantime, we continue to maintain our MARKET PERFORM call on the stock with an unchanged 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 acquiring a stake in the Philippines Charity Sweepstakes Office (PCSO).  However, we are unable to confirm the news at this juncture. We are positive on the news (if it materialises) as an offshore expansion is the way to broaden the company’s earnings base given the limited growth prospects locally. However, previous failed cases of overseas venture by its 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 in Philippines 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 and the lottery games. It currently has 3,232 terminals across 2,600 outlets in Luzon island. PCSO is actually not new to BToto as its subsidiary, Berjaya Philippines Inc (BPI) supplies and maintains a computerised online lottery system and provides software support to PCSO.

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

MARKET PERFORM rating maintained. We reckon that BToto’s local market is fairly matured with limited growth prospects. Thus, an overseas expansion is the way to broaden its earnings base. Although we have a MARKET PERFORM call on BToto, we reckon that income seeking investors may still like the stock for its sustainable and attractive 7%-8% gross dividend yield. Our price target of RM4.52/share is based on DCF valuation where we assumed a WACC of 7.4%. 

Source: Kenanga