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This article first appeared in The Edge Financial Daily on May 23, 2018

Magnum Bhd
(May 22, RM2.15)
Maintain hold with a higher target price (TP) of RM2.10:
The group reported a core net profit of RM55 million (+80% year-on-year [y-o-y], +4% quarter-on-quarter [q-o-q]) in  first quarter of financial year 2018 (1QFY18). The stronger results on a y-o-y basis were mainly due to higher gaming revenue, and better luck factor (the estimated prize payout ratio was 65% for 1QFY18 versus 70% in 1QFY17). We believe that q-o-q comparison does not serve as a good gauge for the group’s financial performance since its earnings are highly seasonal.

Gaming revenue for 1Q increased by 2.1% y-o-y mainly due to higher gaming revenue from its 4D Jackpot game on the back of highly attractive jackpot prizes. 1QFY18 earnings accounted for 24% of our full-year forecast, which we deem to be within expectations. Nonetheless, the group declared a first interim dividend per share (DPS) of four sen, implying a payout ratio of 103%, which is above our expectations of 75%.

The stock has been rerated post general election (rising 18% since May 14), mainly driven by rising optimism that the new administration will intensify its efforts to curb illegal number forecasting operator (NFO) activities, and potential earnings accretion from the abolishment of goods and services tax (GST). With regard to the illegal NFOs, we understand that competition remains high and we do expect that sometime is needed to curtail the activities of illegal NFOs, even if the new administration was to intensify its efforts going forward.

On the GST front, the NFOs have absorbed the GST in the past and a complete abolishment could raise Magnum’s earnings by about 10%. Nonetheless, there is a risk that the government could raise the gaming tax to make up for the tax revenue shortfall arising from the abolishment of GST. This could lead to muted earnings impact on NFO players. Given the lack of clarity with regard to the two issues outlined above, we are keeping our earnings estimates largely unchanged for now.

Despite minimal revisions to our earnings forecasts, we have raised our dividend forecasts to 85% (from 75%) in view of >100% dividend payout in 1QFY18, and management’s guidance that the group will pay out at least 80% of its earnings as dividends, even under the shadow of the unresolved tax dispute case with the Inland Revenue Board. Post revisions to our dividend payout assumption, our dividend discount model-based TP rises to RM2.10. Maintain “hold”. — DBS Group Research, May 22

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