8 things I learned from the 2019 Berjaya Sports Toto AGM

Incorporated in 1969 as Unilite Electric Industries Berhad, Berjaya Sports Toto Berhad (BToto) obtained its current name after acquiring Sports Toto Malaysia Sdn Bhd (Sports Toto) for RM600 million in 1992.

BToto has four main operating subsidiary companies namely Sports Toto, Berjaya Philippines Inc., International Lottery & Totalizator Systems Inc., and H.R. Owen Plc. The core businesses of the group are the operation of Toto betting; motor retailing, repair and maintenance and provision of aftersales services; leasing of online lottery equipment and provision of software support; and development, manufacturing and distribution of computerized wagering and voting systems.

Here are eight things I learned from the 2019 Berjaya Sports Toto AGM:

1. BToto changed its financial year end from 30 April to 30 June, resulting in a 14-month financial period for 2019. Revenue in financial year 2019 (FY2019) was RM6.7 billion compared to RM5.7 billion in FY2018. Sports Toto contributed 54.4% of group revenue, followed by H.R. Owens (42.5%), and others (3.1%).

2. Sports Toto registered revenue of RM3.6 billion in FY2019 versus RM3.1 billion in FY2018. Revenue per draw increased by 1.8%. Sports Toto continued to remain the market leader among all number forecast operators (NFO) in Malaysia in terms of total revenue (followed by Magnum and Damacai) according to BToto’s management. Sports Toto and Magnum hold about 80% of market share, while Damacai holds the remaining 20%. Sports Toto currently has 680 outlets operating throughout Malaysia.

3. In Budget 2020, the government announced stiffer penalties for illegal gambling. Illegal operators will be fined RM1 million and jailed for 12 months, while gamblers will be fined RM100,000 and face custodial sentence of six months starting 2020. The company believes this will benefit the legal gambling industry by attracting more betters. In addition, the government is reducing the number of special draws by NFOs from 11 to eight times a year, which will reduce the total number of draw days by three to 164 days. Although this will reduce revenue, it could be positive for margins as margins on a special draw day are lower compared to a normal draw day as there is an additional 10% gaming tax imposed on ticket sales.

4. Toto 4D Zodiac was launched in June 2019 as part of the company’s initiative to boost customer interest through game enhancement and product innovation. Minority Shareholder Watchdog Group (MSWG) wanted to know about the special features of the game that make it more attractive than other peer products, and how it has performed since its launch. The management answered that four-digit numbers and the Chinese horoscope have a special significance particularly among the Chinese community. The game is the first of its kind in Malaysia as it combines the conventional Toto 4D game with the Chinese Zodiac. Since its launch, sales have been encouraging.

5. Berjaya Philippines Inc.’s (BPI) subsidiary, H.R. Owen, a luxury motor retailer that operates vehicle dealerships predominantly in London, recorded revenue of £532 million in FY2019 compared to £432.2 million in FY2018. It sold a total of 1,646 new prestige cars and 1,435 pre-owned cars versus 1,185 and 1,235, respectively the previous year. H.R. Owen’s profit before tax improved to £8.3 million in FY2019 compared to £6 million last FY2018. The management remains cautiously optimistic about the prospects of the company as it is dependent on new car sales and the cost of getting to market in an expensive city such as London remains high, not to mention the uncertainties surrounding Brexit which have affected consumer spending. That said, the company has a healthy future order bank on upcoming models.

6. BToto recorded a RM75.9 million impairment of goodwill on the lottery equipment lease agreement in the Philippines. MSWG wanted to know how the impairment of goodwill arose and if there was any likelihood of further impairments going forward. The management replied that it had fully impaired the goodwill on the business. It arose from BPI’s disposal of its 20% equity interest in Philippine Gaming Management Corporation (PGMC) and the further dilution of its equity interest (from 80% to 40%) due to the waiver of its rights to subscribe to additional shares issued by PGMC in July 2019. The reason BPI disposed its equity interest in PGMC was to diversify its businesses. It also provided an opportunity to unlock part of its investment in PGMC for working capital and other project investments such as the sanitary landfill project in the Philippines.

7. The management explained that PGMC’s equipment lease agreement (ELA) with the Philippines Charity Sweepstakes Office (PCSO) — the Philippine Government agency responsible for lotteries and sweepstakes — forms the basis for its core business of leasing of lottery equipment. In March 2014, PGMC commenced arbitration proceedings against PCSO whereby both parties agreed to resort to arbitration to settle issues regarding PGMC’s exclusivity as an online lottery lessor of PCSO in Luzon, Philippines. In March 2019, PGMC submitted its proposal for its extension of ELA for a period of three years commencing 23 August 2019. On 3 June 2019, PGMC expressed its intention to bid and took part in the bidding for the five-year lease of the PCSO lottery system. On 9 July 2019, during the opening of the submitted bids, only PGMC was declared eligible subject to evaluation, but was subsequently informed that it failed the required qualifications. PGMC filed a motion with PCSO for reconsideration but was denied. The ELA expired on 22 August 2019 and PCSO has agreed to extend the ELS up to 22 August 2020 on a month-to-month basis pending the bidding process.

8. International Lottery & Totalizator Systems, Inc., a subsidiary of BToto, delivered additional new terminals, games, and technical support to Berjaya Gia Thinh Investment Technology Joint Stock Company in Vietnam. MSWG wanted to know ILTS’s revenue and profit before tax contribution to the group. The company replied that the figures were 1.1% and 3% respectively in FY2019. ILTS recorded higher revenue and profit before tax in FY2019 which was mainly driven by higher revenue contribution from its voting business segment. A key growth strategy for ILTS is to forge strategic alliances to gain access to new and tactically important geographical locations and business opportunities, and capitalize on existing business relationships.

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Young Jia Yi

Jia Yi has been an investor since the age of 18, following the investing philosophies of Buffett and Munger. He currently works as an industry analyst in an independent investment research firm. He is passionate about understanding how things are interconnected in the world and enjoys reading in his free time.

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