BCorp ... Jul10

S&P Results Review & Earnings Outlook

• BCorp’s FY10 (Apr) net profit of MYR83.5 mln (vs. net loss of MYR53.3 mln in FY09) was better than expected, as it was significantly above our forecast of MYR20.1 mln. Revenue of MYR6.78 bln (+6.9% YoY), however, was in line with expectations.

• The better-than-expected earnings were due to write-backs totaling MYR73.7 mln in the impairment value of its investments in associates and jointly-controlled entities as well as disposal gains of MYR84.6
mln from asset sales. The improved revenue emanated from higher contributions from its consumer marketing (+32% YoY), property development (+148% YoY) and financial services (+7% YoY) divisions, that helped to offset lower gaming revenue (-8% YoY). Group EBITDA margin, meanwhile, rose to 13.1% in FY10 (vs. 10.9% in FY09) on improved margins achieved by its financial services units.

• Although 50.7%-owned Berjaya Sports Toto’s (BST MK, MYR4.14, Hold) earnings will be hurt by higher pool betting duties, it will continue to underpin BCorp’s forward earnings. Cosway’s (00288, HKD0.97, Not Ranked) earnings are also expected to grow strongly on its expansion into new markets over the next 12 months. Meanwhile, its property, financial services, motor vehicle distribution and food
businesses are expected to post stronger earnings growth, in tandem with the recovering economic environment.

• After imputing lower NFO earnings due to higher gaming taxes and exceptional gains from Berjaya Retail’s (BRB) listing, we trim our FY11 net profit forecast to MYR299.3 mln (from MYR354.6 mln). We also
introduce our FY12 net profit estimate of MYR184.7 mln.

Recommendation & Investment Risks
• We maintain our Strong Buy recommendation on BCorp and 12-month target price of MYR2.20.

• Our target price remains derived from an unchanged 20% discount to
BCorp’s FD RNAV of MYR2.64, plus the implied value of Cosway ICULS to be distributed to its shareholders and an estimated FY11 net DPS of 1.0 sen. The discount reflects its holding company status and is within the 20%-30% discount range applied to conglomerates in our coverage. We arrive at our FD RNAV by valuing its landbank at market prices, while its BToto and Cosway stakes and Cosway ICULS are marked to market. Its waste disposal and motor divisions are valued at 10x PER (unchanged) their respective forecast FY11 earnings, while its financial services units are valued at an unchanged P/B of 1.5x.

• Despite the sports betting business being a non-starter, we reiterate
our Strong Buy call on BCorp, for its improving earnings outlook that is
backed by resilient and defensive earnings from BST and Cosway’s expansion. We also believe that its share price will continue to recover
on its plans to unlock the value of its assets, which include the IPOs of
BRB and Berjaya Food in FY11. Further earnings upside could emanate from its proposed gaming venture in Vietnam, where a decision is expected soon. Its prospective FY11 P/B of 0.8x also remains attractive vs. the 1.7x-1.8x valuation range of its peers.

• Risks to our recommendation and target price include: (i) a slower recovery in regional economies affecting its property and consumer products units, (ii) weaker lottery ticket sales, further regulatory changes and higher prize payout affecting its gaming unit.