This article first appeared in The Edge Financial Daily on February 24, 2020

Magnum Bhd
(Feb 21, RM2.58)
Maintain buy with an unchanged target price (TP) of RM3.20: Magnum Bhd reported a core profit of RM54 million (-25% year-on-year [y-o-y], +13% quarter-on-quarter) for the fourth quarter ended Dec 31, 2019 (4QFY19).

The weaker results y-o-y were mainly due to lower gaming revenue and a higher prize payout ratio, estimated to be 65.3% in 4QFY19 (versus 63% in 4QFY19), and theoretical payout of 63.5%.

This brings its FY19 core profit to RM239 million, meeting 94% of our full-year estimates, marginally below expectations. The key variation between our FY19 earnings estimates and the group’s reported FY19 earnings is the higher-than-expected prize payout ratio (FY19 estimated payout ratio: 64.4% versus our theoretical payout of 63.5%).

On the other hand, gaming revenue per outlet per draw for FY19 grew by approximately 8% y-o-y, ahead of our assumption of 7%.

Gaming revenue for 4QFY19 decreased by 13% y-o-y, mainly hit by three fewer draws in 4QFY19 compared with 4QFY18, and lower jackpot ticket sales arising from unattractive jackpot prizes due to the higher winning frequency. Stripping off the reduced number of draws, we estimate that gaming revenue per outlet per draw dropped by 7% in 4QFY19.

We understand that this was mainly dragged down by lower jackpot sales due to unattractive jackpot prizes of RM30 million in 4QFY18 and a high base in 4QFY18.

The profit before tax of Magnum’s gaming business dropped by 28% y-o-y to RM75 million during the quarter, adversely impacted by lower gaming revenue and higher prize payout ratio.

The group declared a fourth interim dividend per share (DPS) of three sen, bringing its FY19 DPS to 16 sen. This implies a payout ratio of 95% and is in line with our absolute DPS assumption for FY19, implying a decent yield of some 6%.

As a dominant player in the numbers forecast operator (NFO) sector, we are positive that the group will benefit from the more stringent enforcement by the authorities in curbing illegal NFO activities.

As highlighted in our previous notes, our channel checks and recent discussions with the managements of NFOs indicate that the authorities have accelerated their efforts to curtail illegal NFO activities, particularly since the second half of 2018.

Given that the illegal NFOs’ market size is estimated to be about two times of the legal NFO market, we believe that there is plenty room for the NFOs to grow their earnings if the authorities successfully reduce illegal NFO activities.

Nonetheless, an impending court case involving potential tax liabilities of RM183 million (translating into 12.7 sen per share) sought by the Inland Revenue Board could restrict its dividend payout.

As such, we have subtracted 6.4 sen per share per year (totalling 12.7sen, which is equivalent to the tax amount) from our forecasted FY20 (FY20F) to FY21F absolute dividend payment assumptions.

Our dividend cut is based on the assumptions that the group will use part of its cash flow to pay tax and the tax is paid over two financial years. This results in our estimated DPS of 11.5 sen/12.7 sen for FY20/FY21 respectively, implying a yield of between 4.5% and 5%.

We maintain our “buy” recommendation call on Magnum with a dividend discount model-based TP of RM3.20.

We believe that the potential RM183 million tax bill is a temporary setback for the group. We remain optimistic about the sector’s prospects and expect the group to benefit from the clampdown on illegal NFOs. — AllianceDBS Research, Feb 21