Investment Highlights

• We are maintaining Magnum as a HOLD with a higher DCFbased fair value of RM2.05/share (WACC: 10%, terminal growth rate: 2.5%). We have raised Magnum's FY18F net profit by 4.7% to account for flat ticket sales per draw vs. a decline of 3% previously.

• Magnum has declared a gross DPS of 4 sen for 4QFY17, which brings total gross DPS to 11 sen for FY17. We have forecast a similar gross DPS of 11 sen for FY18F, which translates into a yield of 5.6%.

• The hearing date for Magnum's judicial review proceedings on its notice of tax assessments and stay of proceedings is 5 April 2018. To recap, the tax penalty of RM477.1mil imposed by the Inland Revenue Board would wipe out an estimated 19% of Magnum's shareholders' funds of RM2.48bil as at end-FY17.

• 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 RM334.6mil as at endDecember 2017.

• Magnum's FY17 results were above our expectations but within consensus estimates. The group's net profit rose by 8.9% to RM206.6mil mainly due to a lower prize payout. Turnover was relatively flat at RM2.6bil in FY17.

• In its results announcement, Magnum said that it would match FY17's revenue in FY18F. The group launched a rebranding and reimaging exercise on 8 January 2018 to help address stiff competition from legal and illegal operators.

• As mentioned in previous reports, 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 edged down by about 0.4% to RM15.7mil in FY17. There were 183 draws in FY17, the same as FY16. Comparing 4QFY17 against 3QFY17, gross ticket sales per draw rose by 2.8% to an estimated RM15.6mil. The improvement in ticket sales in 4QFY17 was supported by higher 4D jackpot prizes.

• We estimate Magnum's prize payout at 64.1% in FY17 compared with 65.3% in FY16. Prize payout was roughly 63.1% in 4QFY17 vs. 62.5% in 3QFY17.

Source: AmInvest Research - 28 Feb 2018