JPM: Berjaya Sports Toto

1H FY09 net profit 47% of our FY09 estimate: BToto reported 2Q FY09 net profit of M$114MM, up 23% Q/Q and 27% Y/Y. 1H FY09 net profit came in at M$206MM, representing 47% of our full-year estimate of M$438MM and 49% of consensus estimates.

· Higher sales and lower prize payout in 2Q FY09: Revenue from the NFO segment recorded a significant increase in 2Q FY09 (up 14% Q/Q and 19% Y/Y). Even on a per draw basis, revenue increased by approximately 22% Y/Y and 8% Q/Q mainly attributable to strong sales of the Mega 6/52 game which recorded its highest-ever jackpot prize of M$20MM in October 2008 as well as improved sales contribution from the 4 Digit game. Pre-tax profit also increased 44% Y/Y and 24% Q/Q due to a lower prize payout. Thus, NFO operating margin improved to 18.2% in 2Q FY09 from 16.7% in 1Q FY09 and 11% in 4Q FY08. The results demonstrate that demand remains resilient and relatively inelastic.

Dividend below expectations: The company declared a 2Q FY09 net dividend of 5.25 sen (gross of 7 sen), which represents a payout ratio of approximately 58%. On a cumulative basis, the 1H FY09 net dividend amounted to 9.75 sen, bringing the payout ratio for 1H FY09 to 59%. However, we believe that dividends will likely increase in 2H FY09 as management reiterated its dividend policy of a 75% payout ratio for the year.

· We assume coverage and maintain OW: We are maintaining our earnings estimates for now until we meet with management following the recent transfer in coverage. Our Apr-09 PT of M$5.70 is based on DCF. The stock is currently trading at a FY09E P/E of 13.1x, a slight premium to the market P/E of 11x but we believe this is justifiable given its defensive nature and high dividend yield of 5.7% (assuming a 75% payout ratio). A key risk is unexpected regulatory changes.