Sunday, June 10, 2012

Berjaya Sports Toto Berhad and Sports Toto Malaysia Trust (Financial Statement)

Berjaya Sports Toto Bhd has proposed to spin off Sports Toto Malaysia (STM) into a Sports Toto Malaysia Business Trust. This has prompted me to look into BST and I will share my findings in a 2 parts analysis. This is my first time going into an analysis of foreign share and I have realised the additional difficulty of securing information. Under the deal, Berjaya Sports Toto will hold on to 79.5% of the shareholding of STM and they will get RM 670m in cash and RM 527.4m in promissory note. As always, we will start off with the financial statement analysis.

Figure 1 Income Statement

Looking at figure 1, we can see revenue increasing slowly over the year, peaking in 2009. Subsequently, revenue has dropped by 8.2% in 2010 before a 1.2% increase in 2011. The 2010 drop in revenue is as a result of lower 4D sales (due to a new 4D Jackpot by competitor) as well as lower jackpot which in turn attracted less buying interest. One reason for a lack of strong topline growth has been due to a maturing of market in Malaysia and that Number Forecast Operators (NFO) are not allowed to introduce new games and drawing days without seeking permission.

For profit wise, it seemed to have stayed range-bound from 2006 onwards. One point to note is that there is a write-back on over-provision of RM 50m in tax in 2006 which created a RM 50m boost in profit. The drop in profit in 2010 is in line with the drop in revenue in 2010. For 2011, profit margin has been affected as a result of a hike in pool betting duty from 6% to 8% for all Number Forecast Operator. 

The reason for fluctuating profit margin over the year is as a result of the "luck" factor often involved in gaming operation. A higher number of Jackpot and 1st prize paid out in lottery and 4D will affect the profit margin. This will be discussed in more depth in part 2. Profit margin has traditionally been 10-15% over the years. Do take note of the high corporate tax rate of 25% in Malaysia as the EBT has always been more than 15%.

Figure 2 Balance Sheet

For the Balance Sheet, there is a huge amount of cash and deposit of RM 450m and a RM600m intangible asset. The intangible asset is as a result of goodwill arising from consolidation dating way back before 1992. So long as Sports Toto remain profitable, a write-down on intangible asset is unlikely. For the liability, there will be a concern on the borrowing for the past few years as well as the RM 550m Medium Term Note in 2011. The MTN was taken up in 2011 with the main aim of refinancing its bank borrowing. The question will then be why should such a profitable company be having such borrowing in the first place?

Basically, Berjaya land owns 43.5% of Berjaya Toto and they require huge amount of capital to settle their loan as well as for their property development project. If you have noticed the yellow, blue and red highlight, they stand for share buyback, distribution of treasury share and capital reduction respectively. Not only has Berjaya engaged in share buyback activities and paying special dividend, they have also engaged in huge capital reduction activity. From 2005 to 2007, total equity goes down from RM 1.57 billion to RM 418m as a result of capital reduction and share buyback. With its high minimum dividend payout ratio, Berjaya will then go into some debt for working capital requirement. A year of EBIT can easily cover this seemingly huge amount of debt.

Figure 3 - Cash Flow Statement

The cash flow statement is unlike many other companies. The receipts from customers is actually around 8% higher than the revenue reported. This is as a result of a deduction of 8% gaming tax of total receipts from customer before it is reported as revenue. A huge amount of the cost is the prize payout as well as to supplier and other expenses. Another interesting statement is "Payments for pool betting duties, gaming tax and other government contributions" which is actually the sum of the Pool Betting Duties as well as Gaming Tax which will be explained in Part 2. They have managed to generate around 10-15% of cash from total receipt from customer.

Looking at acquisition of PPE, we can see that this is an asset light business as purchase of PPE is only around 5% of net cash generated from operation. Net cash used in investing activities hardly have a negative impact on cash flow other when they are acquiring additional interest in their subsidiary in 2009 and 2010. For financing activities, debt recycling can be seen from 2006 onwards with constant repayment and drawdown of borrowing. We can also see that dividend payout and capital distribution has been really good to shareholders.

Figure 4 - Key Performance Metrics

The operating profit margin of 15%-20% and net profit margin of 10%-15% have been discussed earlier on. The key reason for such profit margin has been due to prize payout ratio of around 60% as well as government taxes. Adding on all the taxes and dividing by total revenue, we can see that of every $100 earned in revenue, $20 will be paid out to the government in the form of taxes over the past 8 years.

Despite the average profit margin, the company has been enjoying a high ROA figures of more than 20% on average. Return on Equity has been inflated as a result of debt undertaken since 2006. This high ROA ratio arises from its high asset turnover as the business is essentially very scalable. The company FCF/ Net Profit yield has been really fantastic, maintaining at an average of 105% since 2007. The ratio for 2006 should also be more than 100% as a RM 50m over-provision for tax has been reversed but this does not represent any cash inflow.

Figure 5 - Historical Chart

From the historical chart, it seemed like shareholder does not have much capital gain to speak of if they have bought at the start of 2004. However, the company has actually rewarded their long term shareholder immensely as shown below.
Figure 6 - Return to Shareholder

With hindsight, if you have bought the shares in 2003, you will have been awarded with $2.70 of ordinary dividend, $1.35 of special dividend, $1.00 in Capital Distribution which sums up to be a total return of $5.05 over 10 years. On top of that, you will have been awarded with 1 more share for every 14 shares that you own and that the company has bought back approximately 8% of the total share. While the stock price has lingered over the years, long term shareholder of the company will have been very happy with their return. Fluctuating dividend comes not only from fluctuating profit but that the company does not have a fixed dividend payout ratio as the guidance is only a minimum of 75% payout ratio.

Regarding the spin off of Sports Toto Malaysia into a business trust in Singapore, it is likely to be yet another   move to reward their shareholder (Berjaya Land owns 43.5%). Should the proposed listing be completed, Berjaya Sports Toto will hold on to 79.5% of the total shareholding of Sports Toto Malaysia. They will be entitled to an annual ~RM 20m in trust manager fee as well as a total of RM 670m for divesting their remaining stake. Other than the entitlement, Berjaya Sports Toto will also enjoy a RM 527.4m worth of promissory note owned by Sports Toto Malaysia. After the spin off, the only remaining asset should be Philippine Gaming Management Corp which enjoys management fee for managing BPI which is a subsidiary owned by Berjaya Sports Toto and leases out on-line lottery equipment in Philippine.

To conclude, Berjaya Sports Toto will get a total of RM 1197.4m in cash and promissory note in return for divesting 20.5% of stake in a business that generates RM 345m in 2011 which work out to a PE of 17. While Sports Toto Berhad will not be a bad deal considering the estimated dividend yield of 5-6%, it is obvious that Berjaya Sports Toto will get the better deal at the end of the day. Part 2 will be on the business of Toto and lottery as well as the gaming industry in Malaysia.


  1. Value_at_fair_priceJune 19, 2012 at 10:57 PM


    Given the very high ROA, the good free cash flow generated yearly, the not overly high P/E of 14x and the partial monetizing of STM, would you consider assuming the FX risk to invest in Berjaya Sports Toto?

    1. no matter whether you are vested in STM or Berjaya, you will be subjected to FX risk. For STM, the risk is that net profit and dividend reported in SGD will drop as a result if MYR weaken. For Berjaya, it is the fact that all capital and dividend will be affected if you wish to convert back to SGD.

      I am a bit tempted to invest in Berjaya initially given that there will be a capital distribution exercise after the spin-off. However, after taking into account the custodian charges, corporate action fee on dividend, FX risk and that this is purely a dividend play, I supposed there are other options on SGX. I am hoping that the upcoming SGX-bursa link-up will offer comparable terms of investing in Bursa though it has been weird that there has not been much news coming out from SGX yet.

      If you are going to spend some money in Malaysia or you believe that Malaysia will grow faster than Singapore in the long run, it will not be a bad dividend play though we are unsure what will be the price of the stock post capital distribution.

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