Malaysia: Gaming (NFO) - BToto's jackpot monopoly challenged

Magnum has obtained approval to start a new 4-digit game incorporating a jackpot element by end-09. Mildly negative to BToto and mildly positive to Tanjong Plc's long-term prospects. BToto is still a BUY at lower prices

Events
. Magnum has obtained approval from all relevant authorities to launch a new 4-digit game incorporating a jackpot element by end-09.

Impact
. Based on an educated guess of Magnum's game variant (no official details yet) and taking into account Tanjong's likelihood to follow suit to launch a similar product next year, these new games would only modestly dent BToto's longer-term earnings. Our assessment assumes the following for the new games jackpot prizes: a) RM2m start up, b) reasonably high prize limits (e.g. RM20m), and c) lesser popularity for BToto's jackpot games, and hence, slower snowballing of prize quantum. The new games would serve to boost the legal number forecasting market size as illegal bookies do not have the sophistication nor the capital to replicate the jackpot games.

. Modest earnings dampener to BToto, <5% to earnings. But, our sensitivity analysis suggests that losing a jackpot revenue which is equivalent to 5% of gross number forecasting receipts could cause BToto's profit to fall by 9%. Nevertheless, the impact is cushioned by BToto's extensive outlet network (681 outlets, the largest among three NFOs) and jackpot game variants (6).

. A significant positive for Multi-Purpose Holdings (MPHB Mk/NOT
RATED), Magnum's holding company. Magnum's new game variant could potentially raise MPHB's earnings by 10-15%, assuming: a) revenue enhancement of 10-15%, b) prize payout ratio of 55% for jackpot games vs 65% for 4D games, and c) Magnum accounts for 80% of PHB's net profit. Modest benefits to Tanjong Plc (TJN MK/NOT RATED) which we expect to eventually launch a new game variant in 2011 (after it undergoes a system upgrade).


Valuation/Recommendation. BToto: Maintain BUY (on weakness) and DCF-based target price of RM4.90/share (cost of equity of 8.9%, terminal growth of 1%) although the stock lacks a near-term re-rating catalyst. Among the other two NFO operators, Tanjong has more compelling valuations - 8.7x FY11F (ending April) consensus earnings vs Magnum's 2010F PE of 12.4x. Even after imputing earnings enhancements from a new game variant for each company, Tanjong still features a more undemanding PE multiple.