Investment Highlights

• Maintain HOLD on Magnum Bhd with a lower DCF-based fair value of RM1.90/share (WACC: 10%, terminal growth rate: 2.5%) vs. RM1.95/share previously. Although we have raised Magnum's FY17F net profit by 14% on the back of a lower prize payout, we have reduced our assumption of the terminal growth rate in our five-year DCF model from 2.8% to 2.5%. This is due to the weak prospects of the NFO industry.

• Magnum has declared a gross DPS of 4 sen for 3QFY17, which brings total gross DPS to 7 sen for 9MFY17. We have raised our gross DPS forecast from 9 to 11 sen for FY17F (FY16: 13 sen). The gross DPS of 11 sen translates into a decent yield of 6.4% for FY17F.

• The hearing dates for Magnum's judicial review proceedings on its notice of tax assessments and stay of proceedings are 10 January and 24 January 2018 respectively.

• 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 RM342.2mil as at end-September vs. RM478.9mil as at end-June 2017.

• Magnum's 9MFY17 results exceeded our expectations and consensus estimates due to a lower-than-expected prize payout. We had forecast a prize payout of 66% in FY17F vs. an estimated 64.5% recorded in 9MFY17. We have raised Magnum's FY17F net profit by 14.1% to account for a lower prize payout of 64.5%.

• In the results announcement, Magnum said that its gaming revenue in FY17F would be lower than FY16. The gaming industry is expected to be hit by competition from illegal operators and the rising cost of living.

• We believe that Magnum has been more affected by the illegal operators than Berjaya Sports Toto as illegal operators tend to track Magnum's numbers closer. This is due to Magnum's brand loyalty among the older punters.

• Magnum's gross ticket sales per draw shrank by an estimated 2.5% YoY in 9MFY17. There were 136 draws each in 9MFY17 and 9MFY16. On a quarterly basis, gross ticket sales per draw slid by 3.2% in 3QFY17. There were 47 draws in 3QFY17 against 43 draws in 2QFY17.

• We estimate Magnum's prize payout at 64.5% in 9MFY17 against 65.6% in 9MFY16. Prize payout was about 62.5% in 3QFY17 compared with 61% in 2QFY17.

Source: AmInvest Research - 30 Nov 2017