STOCK FOCUS OF THE DAY

Berjaya Sports Toto : Dividends, a sure bet BUY

We are maintaining our BUY rating on Berjaya Sports Toto (BToto) with a higher DCF-based fair value RM5.55/share, from RM5.35/share previously, to account for an expected earnings uplift coming from the imminent introduction of its “Power Toto 6/55” lottery game. We have raised our earnings estimates for FY10F-12F by 1%-5% on the back of stronger betting sales growth assumptions, underpinned by incremental sales from the Power Toto 6/55 lottery game where the jackpot starts from RM3mil, as opposed to RM300,000 previously for its 6/42 game. “Snowballing” effect on sales is expected to be more significant. In our opinion, BToto should remain a core holding. Its structural advantages and attractive business model are well-known. And we continue to expect BToto to outpace the industry’s betting sales growth, having grown by +13% in FY09 against 7% for the industry. In addition, BToto may further “optimise” its games by revamping its less popular digit games - 5-D and 6-D, and the 6/49 lottery game - to maximise betting sales growth. For FY10F, we forecast betting sales to expand by 7%, and 9% in FY11F, with stable payout ratios of 65%-66% (FY09: 64%). As it is, the stock is already offering an attractive yield of 13% (RM0.66/share) based on its current share price of RM5.10/share. This comprises a final dividend of RM0.11/share for 4QFY09, a forward dividend of RM0.19/share for 1QFY10 and also, the distribution of Treasury shares on a ratio of 1:14.

Others :
Cosco Corporation : Weathering through order cuts and deferrals BUY

QUICK TAKES
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AirAsia : Roadshow to gauge investor interest SELL
Sembcorp Marine Ltd : Secured second SeaDragon deal BUY

NEWS HIGHLIGHTS
SP Setia : Plans RM5bil Kuala Lumpur project
Axiata Group : Plans to borrow about RM1bil of Islamic loans
Malaysian Airline System : Malaysian Airlines keeping A380 orders, does not plan capacity cuts
WCT : WCT says targeting RM1bil of new orders this year

AmFraser Research
SMRT Corp Ltd : Defensive earnings amid slow economy BUY

jpmorgan: 5mar Bjtoto (overweight)

• 9M08 results slightly below expectations: Berjaya Sports Toto
reported flat net profits of M$288MM in 9M08 vs. M$284MM in
9M07 while 3Q08 earnings fell 19% to M$98MM, mainly due to
higher prize payout and lower interest income. The results made up
71% of our full-year estimate and consensus and hence, slightly
below expectations. However, we expect the group to make up the
shortfall in 4Q FY08 given the positive Lunar New Year effect. The
group also declared a third interim net DPS of 5.9 sen (1.2% yield)
bringing total net DPS as of 9M07 to 19.2 sen (84% payout).
• Strong revenue growth offset by lower interest income and
higher taxes in 3Q FY08: Despite a 12% increase in NFO revenues,
earnings in 3Q FY08 fell 16% Y/Y to M$98MM mainly due to lower
interest income and an increase in effective taxes from 22% in 3Q
FY07 to 32% in 3Q FY08. Meanwhile, NFO revenues/draw recorded
a strong increase, up 13.6% Y/Y, 9.5% Q/Q, thanks to its latest Mega
6/52 jackpot game introduced in 1QCY08. Operating margins,
however, fell 80bp to 19.2% in 3Q FY08 as a result of higher prize
payouts.
• Capital management remains a key potential catalyst: Under the
current market environment, we think BToto stands out as a
defensive play with strong capital management potential. In addition
to a potential yield of 6% (based on our payout assumption of 100%),
we believe that management’s ongoing share buyback totaling
22.5MM (1.8% of shares) as of 9M08 should also be viewed
positively. Assuming management cancels its cumulative treasury
shares totaling 93.0MM, this could bring about an immediate EPS
enhancement of 7.4% in FY09E.
• Maintain OW: Our April-08 PT of M$5.70 is based on DCF and
implies an 18x P/E vs. the market’s 15x. We believe a premium is
warranted given its attractive yield of 5.7% vs. the market’s 3.6%. A
key risk to our PT is disappointing dividends.

Berjaya Sports Toto - BUY - 6 Mar 2008

9MFY08 revenue of RM2.4b was in line with our’s and market’s
estimates. Net profit of RM287.9m however was lower at 70% of our’s
and street’s consensus, mainly due to lower luck factor and higher
marketing expense.

l QoQ, revenue was up by 8.7% driven by increased sales of 4D games
despite similar draw days of 42 each quarter. Stronger pre-tax growth at
24.2% was boosted by a lower payout (69% vs 72%) coupled with the
higher sales volume.

l YoY, 9MFY08 revenue jumped 9.3% on the back of higher 4D sales
and contributions from sales of Mega 6/52 since 2Q07, despite having
one less draw day. Pretax profit however increased by only 3.0% to
RM408.7m, owning to lower luck factor and lower interest income as intercompany
loan was completely settled in July 07.

l Proposed dividend of 8 sen brought 9MFY08 DPS to 26 sen against
9MFY07 of 37.5 sen, implying payout ratio of 83%. Our forecasted DPS of
36 sen for FY08 based on net payout ratio of 82% should be met based on
the current trend.

l Continual share buyback with total 93m treasury shares as of 31 Jan 2008,
representing 6.9% of its paid up share capital. Assuming the treasury
shares are dividend out in specie, yield should therefore spike up to a
high of 14.7% (7.3% normal + 7.4% special).

l Attractive yield and defensive growth. Sales growth is expected to
average 6.4% for the next 2 years, spurred by resilient economy with FY08
GDP growth forecasted at 6.1%. Yield is attractive at 7.3% and 7.8% for
FY08 and FY09 respectively. Maintain forecasts and BUY call with an
unchanged target price of RM5.60, based on DCF valuation with a
WACC of 10% and terminal growth of 4.5%.

KENANGA INVESTMENT BANK BERHAD (15678-H)