Investment Highlights

• We are maintaining our HOLD recommendation on Magnum with a higher DCF-based fair value of RM2.12/share (WACC: 10%, terminal growth rate: 2.5%) vs. RM2.05/share previously.

• This is to account for higher ticket sales per draw of 2% each in FY18F (vs. zero previously) and FY19F (vs. 1% previously). We believe that the abolishment of the GST (goods and services tax) would help improve ticket sales by boosting consumer sentiment and spending.

• There are two issues here. First, the abolishment of the GST. Second, the impact on Magnum’s tax penalty of RM477.1mil.

• The Ministry of Finance has announced that GST would be zero from 1 June 2018 onwards. However, there was no announcement on the reinstatement of the sales tax. Before GST was implemented on 1 April 2015, lottery companies did not pay sales tax.

• There are two scenarios here. First, if there is no GST and no sales tax. Second, if the GST of 6% is replaced with a sales tax of 6%.

• The abolishment of the GST without the sales tax is positive for Magnum. The lottery companies have been absorbing the GST. Currently, the lottery companies pay a GST of 6% on earnings after prize payout, which translates into 1% to 2% of gross ticket sales.

• Based on the first scenario, we estimate that Magnum’s net profit would improve by 6.8% in FY18F and a stronger 11.1% in FY19F.

• We are unsure of the impact on Magnum’s tax penalty of RM477.1mil. In the best case scenario, the tax penalty would be rescinded or reduced by the new administrative team. In the worst case scenario, the new administration continues imposing the tax penalty on Magnum.

• Recall that the Inland Revenue Board has imposed a tax penalty of RM477.1mil on Magnum, and Magnum has taken the case to court. The tax penalty is currently pending a decision by the court. The tax penalty of RM477.1mil would have wiped out 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.

Source: AmInvest Research - 17 May 2018