07 June 2012
Analysts' views on Berjaya Sports Toto (BJTOTO)'s proposal to spin off the number forecasting operations
There was mixed response from the investing community on Berjaya Sports Toto Bhd's (BToto) proposal to spin off the number forecasting operations (NFO) of Sports Toto Malaysia Sdn Bhd (STM) as a RM6bil business trust in Singapore.
While shareholders may receive a special dividend of about 50 sen from this exercise over the short term, some fund managers feel that investors have to evaluate the longer term prospects as dividends could be less due to the dilution of BToto's stake in the new business trust.
A few fund managers contacted said the main reason they invested in BToto was because of STM's business. which is also the main contributor for BToto earnings.
Now that STM will be listed as a new business trust, Sports Toto Malaysia Trust (STM Trust), BToto's stake will be diluted to 79.5% from 100% previously. Thus, future dividends may be proportionately less.
OSK analyst Keith Wee said while earnings might be diluted post exercise, its capacity to increase dividends could be enhanced.
“We note that the entire corporate proposal is expected to unlock RM1.1bil in cash proceeds for BToto, thus providing ample scope for the group to raise its return on equity via a more pro-active capital management exercise that would entail a combination of special dividends and near-100% dividend payout.
Furthermore, the listed STM Trust is committing to a 100% dividend distribution policy on a quarterly basis.
“This implies a dividend yield of 6% at the proposed issue price of S$0.50,” said Wee.
BToto executive director Freddie Pang said the earnings dilution would be to the extent of the diluted holdings of 79.5%. This dilution will be compensated by an expected special dividend of between 45 sen and 50 sen and an expected higher dividend from STM to the trust as STM's future cash flows will not be adversely impacted by the need to service the RM550mil medium term notes (MTNs).
“STM will receive about RM527.4mil from the initial public offering which will be earmarked for the MTNs repayments. We have also stated that as and when legally possible, we would like to distribute a bulk or all of the units to shareholders. So shareholders who have invested in BToto mainly for exposure to STM will now have direct interest in STM. They can also take the special dividends and buy more of the units when they are listed,” said Pang.
CIMB analyst Loke Wei Wern is overall neutral on the deal. She, however, advises investors to stay invested in BToto. “Even after the proposed divestment, BToto's net yields should hover around 4.5%-5%, which is still appealing in volatile times like these. Our ballpark calculation suggests that the estimated 45 sen special dividend would be sufficient to compensate for nine years of net dividend per share (DPS) loss due to the 20% reduction in shareholdings,” said Loke.
The estimated 45 sen special dividend translates to yields of 11% based on the current share price.
Kenanga Research analyst Teh Kian Yeong feels there may be a de-rating of the stock, as there will now be a breaking up of the NFO business.
He said BToto was doing the opposite of what Multi-Purpose Holdings Bhd (MPHB) recently proposed. MPHB is proposing a demerger and listing of its non-gaming businesses in order to turn the company into a pure gaming outfit
Meanwhile, STM Trust will be listed on the main board of the Singapore Exchange Securities Trading Ltd by mid-November this year where it will raise approximately RM1.24bil.
Under the proposal, the RM6bil consideration will be satisfied via the issuance of 4.43 billion units of STM-Trust to BToto's indirect unit Berjaya Sports Toto (Cayman) Ltd for a total value of S$2.21bil (RM5.47bil) at an issue price of S$0.50. The balance of S$213.4mil (RM527.4mil) will be satisfied by way of a promissory note or bill of exchange to BToto.
BToto Cayman will have an offer for sale of 540 million units of its 4.43 billion units in STM Trust.
At an indicative issue price of RM1.24 (S$0.50), this will raise gross proceeds of RM670mil, translating into 50 sen as a special dividend.
“We think the reduction in annual net DPS could be less given that BToto will be the trustee manager for STM Trust in exchange for a management fee of about RM20mil per annum,” said Loke.
The company may consider distributing a substantial portion or all of the remaining 3.89 billion STM Trust units held by BToto Cayman to BToto shareholders.
RHB analyst Hoe Lee Leng has upgraded BToto to a “trading buy” on the back of the 50 sen dividend and the potential distribution of all or a substantial portion of BToto's remaining units in STM Trust.
Pang added that with this deal, BToto would still be in the NFO business as it had Berjaya Philippines Inc which manages the Philippines Lotto, International Lottery & Totalizator Systems, Inc (US) which manufactures and distributes computerised lottery and voting systems, a 25% strategic stake in the STM Trust (should the board decide to retain this stake and not distribute all the units) and STM Management Pte Ltd, the proposed trustee-manager for the STM Trust.
“In all, the earnings of BToto will still be quite substantial. As a rough guide, Berjaya Philippines' net profit averages RM60mil. while the trustee-manager's fee will be about RM20mil per annum. If a 25% stake in the STM Trust is retained, there will be earnings contribution from that as well,” he said.