Investment Highlights

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

• Magnum has declared a gross DPS of 4 sen for 1QFY18. We have forecast a gross DPS of 16 sen for FY18F (FY17: 11 sen), which translates into a yield of 7.5%.

• We are unsure of the impact from the new government with regards to 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 In the best case scenario, the tax penalty would be rescinded or reduced by the new administrative team.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 team 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 date of the court hearing is 9 July 2018. 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.

• Although Magnum's annualised 1QFY18 results exceeded our expectations, we are keeping our forecast. We expect the prize payout for the full year to be close to the theoretical ratio of 65% to 66% vs. an estimated 64.4% in 1QFY18. On an annualised basis, Magnum’s results would have been within consensus estimates.

• Magnum's net profit rose by 79.7% YoY to RM54.9mil in 1QFY18 on the back of a decline in the prize payout ratio. We estimate Magnum's prize payout at 64.4% in 1QFY18 vs. 69.4% in 1QFY17.

• Magnum's gaming turnover improved by 2.2% YoY to RM712.3mil in 1QFY18. There were 46 draws in 1QFY18, similar to 1QFY17. Also in 1QFY18, Magnum received an extra draw day, which the other lottery operators did not get. On a per draw basis, Magnum's gross ticket sales inched up 2.2% YoY to RM16.8mil in 1QFY18. The increase in sales in 1QFY18 was driven mainly by the 4D Jackpot game, which saw a snowball in prize money.

• Going forward, industry ticket sales may receive a boost from improved consumer sentiment as the GST (goods and services tax) will be abolished on 1 June 2018. Hence, we are keeping our gross ticket sales per draw growth assumption of 2% for FY18F for Magnum. It is not known yet if the sales and service tax will replace the GST for gaming companies.

Source: AmInvest Research - 22 May 2018