Wednesday, June 27, 2012


SATS, Singapore Airport Terminal Service, "is the leading provider of gateway services and food solutions in the region". As stated by the description, SATS's 2 core businesses are in the Gateway and Food industry contributing 31.9% and 67.5% respectively. As majority of the food solution are meant for air passenger, aviation accounted for 59.8% of total revenue which means it is highly correlated with the travel and tourism industry in Singapore.

Figure 1 - Segmental Revenue 

Figure 2 - 5-Years Result Summary

I have compiled the more important numbers in figure 2 and we can see that revenue has nearly doubled over the past 5 years. However, do take note that it has also been driven by acquisition of new business. They acquired SFI in 2009 which contributed 2 months of revenue worth $110m in 2009 before making a full contribution in 2010. In 2011, they acquired 50.7% of TFK which contributed $73m in revenue for 3 months. 

Despite the increase in revenue, it has been noticed that net profit attributable to shareholder has not increased much since 2008. If you take in account that there is a $17m in exceptional item in 2008, then we will have seen a 10% increase in profit over the years as compared to 75% increase in revenue,

Profit margin has dropped sharply since 2009 from a high of 20% to 9.1% currently as a  result of the acquisition of SFI. So is the acquisition of SFI a bad move given that profit margin drops by such a huge amount? Looking at SFI's profit margin before it is being acquired, it is at a figure of around 4-5%. However, this certainly does not imply that it is a bad acquisition. If you were to look at the ROA and ROE, you will have only noticed a slight dip which goes to show that SFI have a high turnover and hence ROE.

In fact, things will have been much better without the consolidation of TFK in 2011 which contributed $73 m in revenue but $74.2m in operating expense, implying an operating loss of $1.2m. Paying $122m for operating loss of $1.2m, it is again not necessarily a bad investment. TFK has been unduly affected by the disaster in March 2011 which resulted in 11 of its airline customers suspending or diverting flight as well as a disruption to raw materials supply. When TFK starts to turnaround, we are going to see significant improvement to the bottom line. In 2010, TFK recorded a revenue of $353m and $27m in EBITDA on total equity of around $180m. 

With regard to the cashflow statement, FCF/Net Profit is at an average of around 90% ranging from 70% to 105%. SATS is not as capital intensive as 60% of the PPE are in leasehold building and land. However, capex has increased rather significantly after the acquisition of SFI though it is still able to generate a pretty healthy FCF.
Figure 3 - Segmental Result

The segmental result shows that the Gateway services is much more profitable as compared to Food solution. Of course, we have to make some adjustment here as the share of profit from associated/ joint venture companies does not contribute to the revenue. ROA for Food Solution is around 7.4% and 10% for Gateway Services. It seemed like the company has been doing while with its investment in associate as we see a ROI of 20%. Gateway Services has a higher profitability as it is more of a service provider unlike the Food Solution where cost of food is involved. Should there be a rapid rise in food prices, expect profitability to be hit.


For its Gateway and Aviation food services in Singapore, SATS is the clear market leader with DNATA being the only competitor. DNATA is owned by Emirate (wholly owned by the Government of Dubai) which helps it to secure contract with Emirate and other airlines. For Gateway, operators need to secure a license from the Changi Airport Group which has currently issued 3 licenses. SATS has a market share of 74% in this area with DNATA having the other 26% of the pie. ASIG, the 3rd licensee, has not been able to secure any business after 1 year of securing the license. In 2004, Swissport got a license to operate but exited within 3.5 years with $15m losses. As such, SATS has a rather strong grip in its market share and is poised to benefit from growth in traffic of Changi Airport Group. One possible risk is that as it is no longer linked to SIA, its chance of losing SIA's contract is slightly higher now.

In terms of aviation food solution, SATS has a market share of 86% as compared to 14% for DNATA. In this area, SATS get to benefit from its economies of scale as it delivers up to 80,000 meals a day through its central kitchen. SIA requires an average of 30-45m meals a day which there is no one in the market with the equipment and expertise to deliver presently.

For its non-aviation related food solution in SFI, around 30% of the revenue comes from military cook-house contract. It is not a monopoly though as NTUC FoodFare is also involved in the catering of food. However, I am pretty sure it is a monopoly in terms of the outfield ration as I always see the same green pack and accessory pack when I went outfield. SFi is also involved in the food distribution business with brands like Farmpride and Singourmet.

SFI has an excellent segment in Abattoir operation as it is the only one in Singapore licensed to provide pig slaughtering services. To understand its profitability, look at similar business in Elite KSB's chicken slaughtering business. They also conduct the Hog Auction market which conducts daily auction of live pigs. As a result, the revenue is highly correlated with the number of pigs imported into Singapore. ROA for this segment is as high as 30% though it only accounts for 15-20% of SFI's net profit.

Cyclical or Recession Proof?

Figure 4 - Operating Statistics

Figure 5 - Passenger Traffic

As shown earlier in Figure 1 that 40% of revenue are non-aviation, this part is likely to be a recession-proof business since a huge portion are from 5-years military contract as well as abattoir operation. As for the other 60% of the revenue, we will need to take a look at figure 4 and figure 5.

Changi Airport Group has shown strong growth in passenger traffic over the past 6 years and has proven its resilience in 2009. Do note that International Visitor accounts for around 50-60% of the total traffic which means that Singaporean accounts for the other 40-50% of it. Theoretically, for every international visitor that arrive, they will also have to leave which means by doubling the international visitor figure you will get their contribution to passenger traffic. Local passenger traffic seemed rather stable with most of the growth coming from international visitor. This has spiked up since 2010 with Formula 1 and our 2 Integrated Resorts.

If we look at figure 4, we can see similar growth and stability in most of the operating metrics other than in Cargo & Mail Handled as well as Inflight Meals Produced which shows an estimated 10% decrease in FY 2010. This does prove that the business of SATS is fairly resilient in a recession. The drop in Inflight Meal though Flights handled increases seemed to imply that that it has undertaken more budget airline business. However, I believe a similar crisis like SARS will still be able to hurt its top and bottom line greatly.

Figure 6 - Share of Result of Associate

While SATS has performed rather well, its associate seemed to get hurt much more during a recession, dropping by nearly 60% in 2009 from its high in 2007. SGD 30 million will be equivalent to around 15% of its net profit. Do take into account that this will also be negatively affected if Sing dollar continues to strengthen.

Therefore, it is likely to be hit by the greatest extent from its associate companies in a recession. Other than a SARS-like event occurring, profit should drop by around 20% (5% from themselves and 15% from associate) during the downturn. With free cash flow/ net profit at a decent percentage, it will not be hard for SATS to maintain a 70% dividend payout ratio throughout the business cycle.

Thursday, June 14, 2012

Berjaya Sports Toto Berhad and Sports Toto Malaysia Trust (Toto Business)

As the name of the company suggests, Berjaya Sports Toto's core business is in selling 4D and Toto just like the Singapore Pool. The only difference is that Berjaya does not do sports betting as it does not have the necessary license. Here's all the games available:

The business is pretty straightforward and simple in that they basically collect bets to form a pool of money. For digit games, the prize money is fixed and you will be awarded if you win a 1st, 2nd, 3rd, consolation or special prize. For lotto, the jackpot involves a fixed guaranteed sum + a percentage of the total pool money. After deducting all the prize payout and expenses incurred, the remainder will be their share of profit.

As with all in the gaming industry, the hold percentage is one of the most important ratio to look at. This is basically the statistically calculated odds that the house is expected to win in the long run. If the 4D has a hold percentage of 60%, it means that in the long run, the house is going to win $60 for every $100 of bets collected. We shall now take a look at the hold percentage of the respective games owned by Berjaya Toto.
Figure 1 - Toto 4D

All the payout and hold ratio are calculated using the probability of striking multiplied by the amount paid out. For the sake of simplicity, I will not show the calculation here. For Toto 4D, you can choose to buy big or small at RM1 per bet. The difference is that in Small, you are entitled to a higher 1st, 2nd, 3rd prize in exchange for not being able to win the special and consolation prize. To summarize, the gross margin (revenue - total payout) for the Toto 4D is 36% and 35% for Big and Small respectively.

Figure 2 - 5D

Figure 3 - 6D

Toto 5D is an extended version of 4D where you will be playing with 5 digits instead of 4 digits. Similarly for 6D, it is 6 digits. In this case the gross margin for 5D and 6D are much higher as compared to 4D at 66.2% and 66.6% respectively.

 Figure 4 - 6/52 Jackpot

 Figure 5 - 6/55 Jackpot

Figure 6 - 6/58 Jackpot

Berjaya's lottery games comprise of 6/52, 6/55, 6/58 jackpot game where you choose 6 numbers out of 52,55 and 58 numbers in total. The jackpot is earned when the 6 numbers you have chosen matched the 6 winning numbers. Do take note that the minimum guaranteed amount and prize pool differs for all the 3 games. The gross margin for the 3 games are 55.92, 52.93 and 52.42% which is higher than 4D but slightly lower than 5D and 6D. The odd of striking Toto for the 6/52, 6/55 and 6/58 games are 1 in 20.35 million, 1 in 28.99 million and 1 in 80.95 million.

Out of the total revenue collected from the pool betting business, 75% are from 4D alone while the other 25% are from 5D, 6D and lotteries (6/52, 6/55, 6/58). 4D is the most popular game in both Singapore and Malaysia and it is a unique game that is hardly played elsewhere. While 4D has one of the lowest margin, it is good to have it as a large proportion of revenue as it helps to stabilise the profit margin. All gambling and casino games make their fortune on the basis of the "Law of Large Number" where given a large number of trials, the results will be very close to the expected probability. 4D is more popular than the other games because it boasts a higher chance of winning though the size of the win is much smaller as compared to Toto. The revenue collected is also more stable as gamblers usually buy the same set of numbers for every draw days for fear of losing the chance to win.

Lottery is more popular among the youngster who wants to be a overnight millionaire. However, as a result of the very low probability of striking Toto, profit margin can fluctuate as a result of lack of sufficiently large number. Revenue collected also tends to fluctuate more as a high accumulated amount of jackpot is required to attract more people to buy. If the Toto strikes more often, the accumulated Jackpot will be reduced and hence the buying interest reduced. Therefore, this is the portion of business where luck is very important. Like casino, while the VIP often brings with them huge amount of chips, they are also the one that tends to create a larger fluctuation in profit margin.

Toto and Gaming Industry in Malaysia

Malaysia (50% are Muslim) is a highly regulated and taxed gaming market as compared to the world due to the fact that Gharar is prohibited in the Muslim culture. Other than the operator's license, factors like the number of draw days, prize payout ratio, type of games allowed are all being tightly regulated. The operators need to seek permission to reduce payout ratio or to introduce new games. Taxes are high with the following charges: 8% pool betting duty on net gaming revenue, 8% gaming tax on gross gaming revenue, 25% casino tax, 10% NSC contribution on gaming pretax profit and 10% royalty on gaming pretax profit. In the case of Berjaya Toto, it needs to pay gaming tax, NSC contribution and pool betting duty on top of the corporate tax.

As it is a highly regulated industry, Berjaya Toto only has 2 other similar competitors in 4D - Magnum and Tanjong. Berjaya Toto is the market leader with the largest network of 680 outlets in Malaysia and an estimated market share of 40%. Currently, Berjaya Toto has a monopoly on the Toto segment of 6/52, 6/55 and 6/58 as well as 5D and 6D because the other 2 competitors do not have the lottery license. Basically, the government does not wish to grant too many license to avoid backlash from the Muslim community of encouraging Haram activities. This is also part of the reason why Berjaya has not been successful in vying for a sport betting license.

Other than the usual "luck" factor that will affect the total revenue and  another factor that can create some fluctuation will be the number of draw days allocated. Berjaya Toto conducts its draw 3 times a week on Wednesday, Saturday and Sunday. 365*7/3 will give us 156.429 days, which means total number of draw days a year is likely to be 156 or 157. This will have a marginal impact on the revenue. Each of the 3 NFOs are also allocated extra draw days called special draw. The number of special draw days differs from year to year according to the mood of the government and usually ranges from 5 to 12. In 2010, Berjaya Sports Toto was allocated with 20 days, but revenue does not actually increase. The reason is that instead of a special draw, all 3 NFOs are allocated common special draw day as compared to the exclusive specival draw days in the past which will generate higher revenue.

With regard to illegal betting, which is a common sign around the world, Berjaya Toto is not as impacted as compared to its competitor. The reason again lies in the type of games they have over their competitors. 4D, 5D are games that bookies can easily take the bets as the payout is not substantial to the extent that they will suffer a huge loss due to "luck". However, for games like Toto 6/52 and e.t.c, the payout is extremely high and one needs to reach a certain scale to be assured of profitability.

In conclusion, we can expect to see up to 10% fluctuation in revenue and profit depending on numerous factors including total prize payout (luck), number of draw days, size of jackpot as well as possible changes in taxation. Generally, revenue and profit will still be relatively stable as 75% of revenue comes from 4D which enjoys the law of large number theory to the largest extent. As compared to a casino business, capital outlay is also much lower. However, between Berjaya Sports Toto and Sports Toto Malaysia, it seemed like  Berjaya Sports Toto might be a better bet as it is selling off a mature business at a PE of 17. That aside, Berjaya Sports Toto will still control Philippines Gaming Management which is in the business of managing lotteries business and has a very high profit margin.

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.