Investment Highlights

• We are upgrading Magnum Bhd from SELL to HOLD as the share price has dropped below our DCF-based fair value of RM1.95/share (WACC: 10%, terminal growth rate: 2.8%). We have raised Magnum's FY17F net profit by 5.3% to account for a lower-than-expected effective tax rate and a higher-thanestimated gross ticket sales per draw.

• On 9 August 2017, the Kuala Lumpur High Court granted Magnum with leave to commence judicial review proceedings. The proceedings aim to quash notice of assessments issued by the Inland Revenue Board. There was no disclosure as to when Magnum will commence the judicial review proceedings.

• To recap, the tax penalty of RM476.5mil imposed by the Inland Revenue Board would wipe out an estimated 20% of Magnum's shareholders' funds as at end-FY16. Magnum would also have to borrow to pay for the tax penalty as it does not have enough cash reserves.

• Magnum's gross cash stood at RM478.9mil as at end-June 2017 vs. RM387.6mil as at end-March. Net gearing stood at 21.0% as at end-June 2017. Operating cash flows amounted to RM138.6mil in 1HFY17 against RM106.0mil in 1HFY16.

• Magnum's 1HFY17 results were above our expectations but below consensus estimates. Magnum declared a gross DPS of 3 sen for 2QFY17. We have raised our gross DPS from 6 to 9 sen for the group. This implies a yield of 5.3% for FY17F.

• In its results announcement, Magnum said that its gaming revenue is anticipated to be lower this year compared with last year. The business environment is expected to be challenging due to intense competition from illegal operators and cautious consumer spending.

• Magnum has been hit harder by the illegal operators compared with Berjaya Sports Toto as punters playing at illegal operators tend to track Magnum's numbers more. This is due to Magnum's brand loyalty among the older punters.

• We forecast industry ticket sales to inch down by 1.8% in 2017F vs. a decline of 2.7% in 2016. We estimate Magnum's gross ticket sales per draw to fall by a smaller 3% in FY17F vs. 3.9% in FY16.

• Gross ticket sales per draw declined by an estimated 2.3% YoY in 1HFY17. Comparing 2QFY17 against 1QFY17, gross ticket sales per draw eased by 4.8% due to three fewer draw days. We estimate Magnum's prize payout at 65.5% in 1HFY17 vs. 66.5% in 1HFY16. Prize payout was about 61% in 2QFY17 against 69% in 1QFY17.

Source: AmInvest Research - 24 Aug 2017