Berjaya Sports activities Toto Berhad: Defensive Yield Play Nonetheless Topic To Regulatory Dangers (OTCMKTS:BJSAF)

Elevator Pitch

Malaysia-listed Berjaya Sports activities Toto Berhad (OTCPK:BJSAF) [BST:MK] is a defensive yield play, due to its standing as the biggest legalized quantity forecast operator or NFO in Malaysia and a comparatively excessive consensus ahead FY2020 dividend yield of 6.2%. Berjaya Sports activities Toto presently trades at 13.4 occasions consensus ahead FY2020 (YE June) P/E, representing a slight low cost to its historic five-year common ahead P/E of roughly 15 occasions.

I assign a “Impartial” ranking to Berjaya Sports activities Toto. Though the corporate is a possible beneficiary of harsher penalties and crackdown on unlawful NFO operators, Berjaya Sports activities Toto can be topic to potential regulatory dangers akin to greater gaming taxes and an additional discount within the variety of particular attracts going ahead.

Readers are suggested to commerce in Berjaya Sports activities Toto shares listed on Bursa Malaysia (the inventory alternate of Malaysia) with the ticker BST:MK the place common each day buying and selling worth for the previous three months exceeds $400,000 and market capitalization is above $800 million. Buyers can put money into key Asian inventory markets both utilizing U.S. brokers with worldwide protection akin to Interactive Brokers, Constancy, Charles Schwab, or native brokers working of their respective home markets.

Firm Description

Began in 1969 as Unilite Electrical Industries Berhad earlier than being renamed as Berjaya Sports activities Toto Berhad in 1993, the corporate is likely one of the three legalized quantity forecast operators or NFOs in Malaysia and the biggest within the nation with a 43% market share. The opposite two NFOs are listed operator Magnum Berhad [MAG:MK] and personal firm Da Ma Cai. As of end-June 2019, Berjaya Sports activities Toto operated 680 retailers in Malaysia and supplied eight names, Toto 4D, Toto 4D Jackpot, Toto 5D, Toto 6D, Star Toto 6/50, Energy Toto 6/55, Supreme Toto 6/58, and Toto 4D Zodiac. The Malaysian NFO enterprise contributed roughly 92% of its working revenue from persevering with operations in FY2019 (YE June).

The corporate additionally has gaming operations within the Philippines. Berjaya Sports activities Toto owns an 88.26% stake in subsidiary Berjaya Philippines, which in flip owns a 39.99% fairness curiosity, Philippine Gaming Administration Company or PGMC, which is engaged within the leasing of on-line lottery tools and provision of software program help to the Philippine Charity Sweepstake Workplace. PGMC has 4,945 lottery terminals put in in 4,792 retailers within the Luzon territory as of June 30, 2019. Berjaya Philippines has an entirely owned subsidiary, H.R. Owen Plc, an operator of luxurious car dealerships within the status and specialist automotive marketplace for each gross sales and after-sales primarily in London.

I might be focusing totally on Berjaya Sports activities Toto’s core Malaysian NFO enterprise, which accounts for the majority of the corporate’s working earnings, for the aim of this text.

Harsher Penalties And Crackdown On Unlawful Operators Partially Offset Regulatory Threat

The unlawful NFO market in Malaysia is presently estimated to be between two and thrice the scale of the legalized NFO market. In an interview with The Enterprise Yr in 2019, Berjaya Sports activities Toto CEO Nerine Tan Sheik Ping highlighted that there was “an enormous enhance within the variety of unlawful playing operators, which impacted our gross sales and people of all NFOs” lately. As per the chart beneath, Berjaya Sports activities Toto’s annual income for the Toto Betting/NFO and Leasing of Lottery Tools section (which incorporates the Philippine gaming enterprise) has been steadily declining from RM3,355 million in FY2015 to RM3,123 million in FY2019 (a 14-month monetary interval from Could 1, 2018, to June 30, 2019, as the corporate modified its monetary yr finish).

Berjaya Sports activities Toto’s Annual Income By Phase

Supply: Writer

On October 11, 2019, Malaysia’s Minister of Finance, Lim Guan Eng introduced that penalties imposed on unlawful NFOs and unlawful gamblers might be elevated as a part of Finances 2020. Previously, the utmost penalty for unlawful playing operators was a mere RM50,000. In distinction, the brand new guidelines can have unlawful playing operators topic to a a lot harsher minimal penalty of RM1 million, with no most penalty determine disclosed but. Going ahead, convicted unlawful gamblers additionally should face a minimal jail time period of six months, and the utmost penalty might be elevated from RM5,000 to RM100,000. Unlawful NFOs have been engaging for gamblers, as a result of they provide prize payouts which are 10%-20% greater than these supplied by legalized NFOs. The harsher penalties for unlawful gamblers in Malaysia may act as a deterrent and draw extra of the gamblers again to legalized NFOs like Berjaya Sports activities Toto. Nonetheless, the precise timeline for the modification to the Gaming Act and the implementation of the brand new guidelines is unsure in the mean time.

The Malaysian authorities have additionally been cracking down on unlawful operators by raiding unlawful playing and NFO retailers with a rise in depth since 2018. The Royal Malaysian Police arrange particular operations rooms with hotlines in each state in Malaysia since July 2018 to permit individuals to report unlawful gaming actions. In the identical 2019 interview with The Enterprise Yr in referred to above, Berjaya Sports activities Toto CEO Nerine Tan Sheik Ping expressed confidence that such enforcement actions will “have a big impact on our gross sales and enhance the federal government’s tax revenues.” A March 2019 article revealed by Malaysian media The Star highlighted that NFO gross sales have rebounded as a consequence of simpler and lively enforcement.

On the flip facet, there are issues that enforcement actions by the authorities won’t be as efficient as perceived, as these are centered on closing down unlawful bodily retailers, whereas many of the unlawful operators are working on-line. However the Malaysian enforcement companies notice this and are additionally beginning to goal on-line operators as effectively. In September 2019, the Malaysian police arrested 247 individuals in reference to an unlawful China-facing on-line playing operation.

Berjaya Sports activities Toto additionally faces a key regulatory danger regarding gaming taxes. Previous to the Finances 2020 announcement on October 11, 2019, there was hypothesis that there might be a possible enhance in gaming-related taxes which may have diminished Berjaya Sports activities Toto’s ahead earnings by a excessive single-digit share. Whereas there was no enhance in gaming-related taxes for the NFO sector as a part of Finances 2020 in October 2019, a rise in gaming tax going ahead cannot be dominated out. Gaming tax and pool betting responsibility for NFOs have been final elevated in 1998 and 2010, respectively.

Discount In Particular Attracts And The Launch Of A New Product

There have been two vital developments for the NFO sector and Berjaya Sports activities Toto in 2019.

The variety of particular attracts (as in comparison with common attracts held each Sunday, Wednesday and Saturday) was diminished from 11 in 2019 to eight in 2020 following the Finances 2020 announcement in October 2019. Earlier, the variety of particular attracts was minimize from 22 in 2018 to 11 in 2019 throughout Finances 2019. The Malaysian authorities is decreasing the variety of particular attracts to partially sort out social points regarding playing dependancy. Berjaya Sports activities Toto and different NFO gamers are more likely to undergo from decrease ticket gross sales as a consequence of a discount variety of particular attracts in 2020, however this might be partially offset by an enchancment in profitability as there may be an extra 10% gaming tax imposed on the ticket gross sales for particular attracts.

Previous to 2019, Berjaya Sports activities Toto had a portfolio of seven video games, together with three digital video games, three lotto video games, and one hybrid digital-lotto sport. In June 2019, the corporate launched a brand new sport referred to as Toto 4D Zodiac, which is a variant of the 4D (4 digits) sport, combining 4D outcomes and a Chinese language Zodiac.

With a minimal guess of RM1, gamblers can win RM18,000 in the event that they decide each the 4 digits that seem as the primary prize for 4D and the right Chinese language zodiac. Such new sport variants are not any totally different from product line extensions launched by Quick Shifting Shopper Items or FMCG corporations and permit NFO operators like Berjaya Sports activities Toto to generate incremental income with out vital extra prices. Key challenges in launching new video games are assessing client preferences and securing regulatory approvals.

Earnings Contribution From Philippine Gaming Enterprise At Threat

Berjaya Sports activities Toto’s Philippine gaming enterprise, Philippine Gaming Administration Company or PGMC, didn’t renew the tools lease settlement (involving leasing of on-line lottery tools and provision of software program help) with the Philippine Charity Sweepstake Workplace in Luzon which expired on August 22, 2019.

Based on a October 26, 2019, article revealed by Manila Commonplace titled “The Actual Lotto Jackpot Winner”, PGMC is presently nonetheless leasing lottery tools to the Philippine Charity Sweepstake Workplace on an interim foundation till a brand new tender is named. An earlier tender for the lottery tools leasing contracts for the Philippine Lottery System (previously referred to as Nationwide On-line Lottery System) was carried out in July 2019 with no successful bids awarded.

On the optimistic facet of issues, Berjaya Sports activities Toto’s dividend payout is unlikely to be affected, because the core Malaysian NFO enterprise generates the majority of the corporate’s working earnings, and dividends are primarily paid out from the money circulate of the Malaysian NFO enterprise with PGMC not paying any dividends to Berjaya Sports activities Toto.

Valuation

Berjaya Sports activities Toto trades at 13.4 occasions consensus ahead FY2020 (YE June) P/E and 13.0 occasions consensus ahead FY2021 P/E based mostly on its share worth of RM2.60 as of January 3, 2020. The inventory’s ahead FY2020 P/E represents a slight low cost to its historic five-year common ahead P/E of roughly 15 occasions.

Berjaya Sports activities Toto gives consensus ahead FY2020 and FY2021 dividend yields of 6.2% and 6.3%, respectively. The corporate didn’t declare any dividends for the 2 months monetary interval between Could 1, 2019, and June 30, 2019, after it modified its fiscal yr finish from April 30 to June 30. Berjaya Sports activities Toto declared an interim dividend per share of RM0.04 for 1QFY2020 in November 2019, which represented an 80% dividend payout ratio.

Variant View

The important thing danger elements for Berjaya Sports activities Toto are larger-than-expected market share loss to unlawful operators, on-line casinos, and sports activities betting; larger-than-expected prize payout ratio (decided by luck); a hike in gaming taxes in future; and a lower-than-expected dividend payout ratio.