Fewer NFO draws likely to have minimal impact on Magnum

This article first appeared in The Edge Financial Daily, on August 28, 2018.
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Magnum Bhd
(Aug 27, RM1.98)
Maintain hold with an unchanged target price (TP) of RM2.18:
Magnum Bhd’s second quarter ended June 2018 (2QFY18) core net profit clocked in at RM48.1 million, down 19.8% year-on-year (y-o-y).

This brought the group’s cumulative core net profit to RM103 million, which was largely in line with our and market expectations at 47% and 48% of the full-year forecasts, respectively.

The group also declared 2QFY18 dividend per share (DPS) of three sen, bringing 1HFY18 DPS to seven sen, which was in line with our expectations of financial year ending Dec 31, 2018 (FY18) DPS of 12 sen.

Even though 1HFY18 number forecast operator (NFO) sales remained rather flat y-o-y at RM1.3 billion, the group experienced a pre-tax profit jump of 12.7% y-o-y to RM150.3 million on the back of a lower prize payout ratio.

We estimate that Magnum’s prize payout ratio came up to 70% for 1HFY18, which was lower by 1.1 percentage points y-o-y as compared to 1HFY17’s estimated prize payout ratio of 71.1% y-o-y.

On a quarterly basis, Magnum’s second-quarter NFO revenue declined 15.7% while pre-tax profit dropped 12%. The group’s sales were negatively impacted by the World Cup season in the current quarter.

As a result, 2QFY18 pre-tax profit was lower quarter-on-quarter and this was made worse by a higher estimated prize payout ratio of 70.2% (versus 1QFY18’s: 68.2%).

To recap, the finance minister announced that the government intended to reduce the number of special draw days by NFOs in 2019.

Even though we are unclear on the exact reduction, we think that this will have a minimal impact on the players given that the margins for special draws are substantially lower than that of the normal draws because of the additional 10% tax imposed. Additionally, special draw days collect around 15% to 20% lower sales than normal draw days.

We make no changes to our FY18-FY20 earnings per share (EPS) forecasts and maintain our “hold” call.

We think that investor sentiment is becoming defensive and Magnum’s yields of 6% to 6.5% should provide support for its share price. We still prefer Berjaya Sports Toto Bhd (Add, TP: RM2.90) as we think that Magnum’s substantial tax fine could result in a share price overhang if left unsettled.

Upside risks to our call include more effective clampdown efforts on illegal betting, which could propel revenue growth. Downside risks are weaker-than-expected consumer sentiment and reinstatement of goods and services tax rates. — CGSCIMB Research, Aug 27