PP 7767/09/2010(025354)

13 May 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

13 May
13 2010
May 2010
MARKET DATELINE

Berjaya Sports Toto Share Price

Fair Value
:
:
RM4.64
RM4.95
Place Your Bets! Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (BTOTO; Code: 1562) Bloomberg: BST MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Apr (RMm) (RMm) (sen) (%) (x) (x) (x) (x) (%) (%) (%)
2009 3,695.7 410.5 32.7 18.4 14.2 - 12.8 NM 101.2 6.7 6.3
2010f 3,419.0 414.3 30.7 (6.2) 15.1 31.0 33.0 NM 96.0 46.2 5.1
2011f 3,445.6 437.1 32.4 5.5 14.3 33.0 18.8 NM 102.3 38.9 5.2
2012f 3,470.0 459.0 34.0 5.0 13.7 34.0 18.6 NM 86.1 33.9 5.4
Main Market Listing / Non-Trustee Stock / Non Syariah-Approved Stock By The SC * Consensus Based On IBES
E i

♦ Berjaya Corp buys 70% stake in Ascot Sports. Berjaya Corp has Issued Capital (m shares) 1,351.0
entered into a conditional S&P agreement with Tan Sri Dato’ Seri Vincent Market Cap(RMm) 6,268.8
Tan Chee Yioun (TSVT), for the proposed acquisition of a 70% equity stake Daily Trading Vol (m shs) 1.0

in Ascot Sports S/B (Ascot) for RM525m. BCorp is also proposing to 52wk Price Range (RM) 4.11-4.99
Major Shareholders: (%)
undertake a renounceable rights issue of up to RM614.45m nominal value
Berjaya Land 48.0
ICULS on a one-for-eight BCorp shares basis. The Minister of Finance has
Tan Sri Vincent Tan 5.6
given its approval for the re-issuance to Ascot of the licence to carry out (direct)
sports betting operations upon certain terms and conditions. Ascot
proposes to commence its sports betting operation in the 2nd half of the FYE Apr FY10 FY11 FY12
year 2010 subject to relevant approvals being obtained. EPS chg (%) - - -
♦ Market potential large, but margins thin for BCorp. While the market Var to Cons (%) (1.1) (2.0) (0.1)
potential is large, we note that there are a few drawbacks to the system,
PE Band Chart
given the fact that no internet betting would be allowed and all betting is
done on cash terms. Although we expect these drawbacks to result in a
PER = 16x
more “mass market” punter base, we believe BCorp’s monopoly would PER = 13x
guarantee it at least a certain percentage of the sports betting market. We PER = 10x

expect operating margins to be thin at about 7% in the first full year of

operations in FY04/11, while net margins would be about 5%, given the
high prize payout ratio, the gaming tax, the agency commissions and
overheads that need to be borne.
♦ Impact to BToto minimal. The impact to BToto’s earnings is very
Relative Performance To FBM KLCI
minimal at this stage, given the fact that distribution is divided between
retail outlets and telephone betting; and that the 1% agent commissions
will have to be split further between the agencies and BToto. Based on our
KLCI
calculations, we estimate the impact to BToto’s profits would be a minimal
1.3% for FY04/11, and 1.9% for FY04/12.
♦ Risks. Main risks for BToto include: 1) Poor luck factor causing high prize Berjaya Sport Toto

payout ratios; 2) Regulatory changes for NFO industry to discourage

gambling in the country or to allow competitors more outlets and more
game variations; and 3) Hike in gaming taxes.
♦ Forecasts unchanged. We maintain our earnings forecasts for BToto for
now, as we prefer to wait and see if this is able to capture a decent size of
the illegal gaming market.
♦ Investment case. No change to our Outperform call and our DCF-based
Hoe Lee Leng
fair value of RM4.95 (WACC 9.8%). Although earnings impact for BToto is (603) 92802184
minimal, we believe this development will nonetheless boost sentiment on hoe.lee.leng@rhb.com.my
the stock, given that the impact is still a positive one. At current valuation
levels, we believe BToto continues to provide decent dividend yield
prospects and is now trading at the lower-end of its 10-year historical PE
range of 11-19x.

Please read important disclosures at the end of this report. Page 1 of 5

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 13 May 2010

The Deal

♦ Berjaya Corp buys 70% stake in Ascot Sports. Berjaya Corp has entered into a conditional S&P agreement
with Tan Sri Dato’ Seri Vincent Tan Chee Yioun (TSVT), for the proposed acquisition of a 70% equity stake in
Ascot Sports S/B (Ascot) comprising 56m shares for a total cash consideration of RM525m. The remaining 30%
stake in Ascot is owned by TSVT’s son, Dato’ Robin Tan. BCorp is also proposing to undertake a renounceable
rights issue of up to RM614.45m nominal value ICULS on a one-for-eight BCorp shares basis on an entitlement
date to be determined later. The Minister of Finance has given its approval for the re-issuance to Ascot of the
licence to carry out sports betting operations upon certain terms and conditions. Ascot proposes to commence its
sports betting operation in the 2nd half of the year 2010 subject to relevant approvals being obtained.

♦ Deal comes with profit guarantee. The payment of cash will be paid in two tranches: (1) RM400m to be paid
within 12 months from completion date; and (2) the balance of RM125m to be paid later as part of a 3-year profit
guarantee given by TSVT. We note that in FY12/08, Ascot recorded a loss after tax of RM4.6m and had net
liabilities of RM11.2m. However, under this deal, TSVT has undertaken a guarantee that the aggregated profits
after tax of Ascot for the 3 FYs to FY04/2013 shall not be less than the sum of RM375m, and that this sum has to
be certified by auditors.

♦ Why BCorp and not BToto? This deal was termed a ”sweetheart deal’ by TSVT, which implies he has a soft spot
for BCorp over BToto. However, we believe the more rational reason is that BCorp would be perceived as a more
“neutral” party when it comes time to extend its distribution channels to the other NFOs at a later stage, which is
one of the longer-term terms of the sports betting licence.

Table 2. Salient terms of licence

1 Licence Renewable every year at RM10m per year (but Ascot appealing for staggered fee)

Distribution channels at initial

2 220 Sports Toto outlets in Peninsular Malaysia
stage
Telephone betting

3 Internet information website
Identical design to betting websites showcasing product offerings and game odds
Customer account registration
Internet banking for cash deposit and withdrawal
Promotional campaigns and marketing
Live streaming of sports events

4 Retail outlets Outlet facilities, terminal, communication network and infrastructure shared with BToto
Minimal capex outlay for BToto as software paid for by Ascot

5 Telephone betting 24x7 operation using call centre with operator-assisted betting
Pre-registration process, cash deposit at outlets and multiple payment gateways

Soccer, moving to other sports later - English Premier League, Italy Series A, Spanish Premera
6 Game types
Liga, Germany Bundesliga 1

7 Betting types Asian handicap, 1x2 (Home/Away/Draw), Over/.Under, Odd/Even, Combination bets

8 Betting Deadline Pre-match 90 minutes (Dead Ball)

9 Prize payout ratio 85-98.5%

10 Gaming tax Estimated at 10% although not finalised with government yet (on gross winnings)

Agent Commission (only

11 1% (to be shared between BToto and BToto's agents) on sales or 10% on gross winnings
applicable for retail betting)

12 Minimum Bet RM5 for retail outlet

RM20 for telephone betting
Only cash betting, no credit betting

13 Potential sales mix 70% retail, 30% telephone (@ initial stage)

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 13 May 2010

Our View

♦ Does this address the issues we had? Yes, partially. As mentioned in our earlier reports, implementation is
a key determinant of success of sports betting in the country and we believe Ascot does have the right tools and
experience to be able to succeed in this venture. We understand Ascot already has the systems and software on
hand, as this was already acquired back in 2003, while it already has about 3 years of sports betting experience
given its previous online betting operations in UK and Philippines, which ended in 2008. BCorp estimates
additional capex required is about RM20-25m to be spread over the next 3 years.

♦ Size of market – RM19.9b achievable? While BCorp estimates the maximum potential of the sports betting
market to be about RM19.9bn, the amount BCorp is able to capture would depend on the betting system itself
and whether it appeals to the illegal sports punters out there. The RM19.9bn sports betting market potential is
based on a ratio of 1.5% of GDP, which is based on Singapore and Hong Kong’s sports betting expenditure. We
believe there will be a few drawbacks to the system, which in most instances, is due to the sensitivity of gambling
in a country like Malaysia, including:

(1) No internet betting – which will reduce the number of punters who are used to betting online with quick
and immediate results;

(2) Telephone betting – if there are not enough telephone lines especially during “peak periods”, this could
cause frustration and punters may turn elsewhere to place their bets;

(3) No credit given – As this is a cash only operation, no credit will be given and punters are not allowed to use
their credit cards to place their bets. This severely restricts the amount punters would be willing to place on a
bet and potentially result in only “mass market” punters who bet smaller amounts.

♦ 5% market share in 1st year, increasing to 20% in 3rd year. In order to meet the profit guarantee, BCorp
expects to be able to capture about 5% (or RM950m) of the total RM19.9bn sports betting market in the first
year of operations, 13.5% (or RM2.7bn) in the second year and 20% (or RM3.9bn) in the third year. We note that
these estimates are based on the initial conditions of the sports betting licence and do not include any additional
distributor outlets, any changes to types of games, bet deadline or types of bets. We believe these targets are not
too ambitious to begin with, and could actually be achievable, given BCorp’s monopolistic operating environment,
and use these assumptions to calculate the impact on BToto’s earnings below.

♦ More outlets, other NFOs and game variants at later stage. BCorp has mentioned that at a later stage,
subject to government approval, more outlets will be allowed to be distributors and other NFO’s will also be
allowed to be appointed distributors. However, BCorp is likely to exhaust its distribution strength via all 680 of
BToto’s outlets first before moving on to distribute in the other NFO outlets. In addition, BCorp will be angling for
more game types will be allowed, different types of bets as well as different bet deadlines at a later stage. We
would not include these variants to our initial calculations for BToto for now.

♦ Thin margins for BCorp, but volume is key. While margins will be low for BCorp, given the high prize payout
ratio, the gaming tax, agency commissions and overheads that need to be borne, the fact that it will be operating
a monopoly conceivably for the initial few years, will guarantee at least a certain percentage of the sports betting
market. As mentioned in our earlier reports, given the fixed overheads involved, the economies of scale theory
would apply, as the larger the volume of bets, the higher the margins. In Table 3 below, we calculate BCorp’s
profitability for FY04/11, which will be the first full year of operations, assuming market share is at 13.5%. We
have done a sensitivity analysis based on a best case, median case and worst case scenario, reflecting the
different margins obtained at different prize payout ratios. From this analysis, it can be seen that for BCorp the
initial operating margins would be only about 6.8%, while net margins would be about 4.8%.

♦ Impact to BToto’s earnings minimal. As for BToto, the impact to earnings is very minimal at this stage, given
the fact that:

(1) Distribution is divided into retail outlets and telephone betting. We have assumed 70% of betting will be via
the retail outlets initially, with 30% going via telephone betting, although this is likely to reduce going
forward, as more people get used to telephone betting, given the relative ease of telephone betting versus
physically going to the outlet.

(2) Out of the 1% agent commissions Ascot intends to pay, this will have to be split further between the agencies
and BToto. We have assumed that the agencies get a 60% cut of the commission, while BToto gets the
remaining 40%.

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 13 May 2010

Based on these variables, the impact to BToto’s profits assuming the median case scenario, would be a minimal
1.3% to FY04/11’s profits (Table 3). Going forward into the third year, however, this would rise to about 1.9%.

Table 3. Potential Margins For Sports Betting For Retail Operations

Theoretical Prize Payout Ratio (%) 85% 90% 98.50%
RM'm RM'm RM'm

Gaming Receipts 2700.00 2700.00 2700.00

Theoretical Prize Payout (2295.00) (2430.00) (2659.50)
Gross Winnings 405.00 270.00 40.50

Gaming Tax (10% of gross winnings) (40.50) (27.00) (4.05)

Agent commissions (10% of 70% of gross winnings) (28.35) (18.90) (2.84)
Overheads (est.) (40.00) (40.00) (40.00)

Operating Profit 296.15 184.10 (6.39)

Operating Margin (%) 10.97% 6.82% -0.24%

Other expenses (10.00) (10.00) (10.00)

Pretax profit 286.15 174.10 (16.39)

PBT Margin 10.60% 6.45% -0.61%

Tax (@ 25%) (71.54) (43.53) 4.10

Net Profit 214.61 130.58 (12.29)

Net Profit Margin (%) 7.95% 4.84% -0.46%

BToto’s share of agency commission 11.34 7.56 1.13

(Assuming 40% to BToto, 60% to agencies)

Impact to Btoto's profits (afer tax) 1.95% 1.30% 0.19%

Source: RHBRI

Risks

♦ Main risks for BToto include: 1) Poor luck factor causing high prize payout ratios; 2) Regulatory changes for NFO
industry to discourage gambling in the country or to allow competitors more outlets and more game variations;
and 3) Hike in gaming taxes.

Forecasts

♦ Forecasts unchanged. We maintain our earnings forecasts for BToto for now, as we prefer to wait and see if
this is able to capture a decent size of the illegal gaming market. In any case, we note that the impact to
earnings is minimal, at between 1.3-1.9% for FY04/11-12.

Investment case

♦ Maintain Outperform. No change to our Outperform call and our DCF-based fair value of RM4.95 (WACC 9.8%).
Although earnings impact for BToto is minimal, we believe this development will nonetheless boost sentiment on
the stock, given that the impact is still a positive one. At current valuation levels, we believe BToto continues to
provide decent dividend yield prospects and is now trading at the lower-end of its 10-year historical PE range of
11-19x.

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 13 May 2010

Table 4. Earnings Forecasts Table 5. Forecast Assumptions

FYE Apr (RMm) FY09a FY10F FY11F FY12F FYE Apr FY10F FY11F FY12F

Turnover 3695.7 3419.0 3445.6 3470.0 Revenue per draw day (RMm) 21.8 21.9 22.1
Gaming 3680.1 3395.7 3421.1 3444.3 No. draw days 156 156 156
Others 15.6 23.3 24.5 25.7 Gross prize payout ratio (%) 63.0 63.0 63.0
Turnover growth (%) 12.7 (7.5) 0.8 0.7 No. of outlets 680 680 680

EBITDA 615.3 612.1 628.7 647.8

Gaming 633.1 632.1 648.7 657.8
Others (17.8) (20.0) (20.0) (10.0)
EBITDA margin (%) 16.6 17.9 18.2 18.7

Depreciation (17.3) (17.7) (18.0) (18.2)

Net Interest (11.2) (18.4) (23.4) (20.9)
Associates (0.0) 0.0 0.0 0.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 585.3 574.6 585.9 607.3

Tax (167.1) (163.7) (152.3) (151.8)
PAT 418.3 410.8 433.6 455.5
Minorities (7.8) 3.5 3.5 3.5
Net Profit 410.5 414.3 437.1 459.0

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
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be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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may from time to time have an interest in the securities mentioned by this report.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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