Investment Highlights

• We are keeping our SELL recommendation on Magnum with a lower DCF-based fair value of RM2.01/share (WACC: 10%). We have reduced our assumption of Magnum’s terminal growth rate in our DCF calculation from 2.5% to 2.0% due to the industry’s weak prospects. Magnum is currently trading at an FY19F PE of 15.6x.

• We believe that consumer spending in Malaysia would be weak after the imposition of the sales and services tax (SST) on various goods and services on 1 September 2018. The SST is expected to be either 6% or 10% depending on the product. Magnum is also anticipated to be affected by the reduction of special draws in FY19F.

• Magnum’s annualised 1HFY18 results were above our expectations but below consensus estimates. We have raised Magnum’s FY18F net profit by 3.3% to account for the zero-rated GST from June to August 2018. The new services tax of 6% will replace the 6% GST from 1 September onwards.

• We have not adjusted Magnum’s FY19F net profit for the reduction in the number of special draws as there are no details yet. Recall that the government will be announcing a reduction in the number of special draws in Budget 2019 in November 2018.

• Magnum has declared a gross DPS of 3 sen for 2QFY18. This brings total gross DPS to 7 sen for 1HFY18. We have forecast a gross DPS of 13 sen for FY18F (FY17: 11 sen), which translates into a yield of 6.5%. Our original DPS forecast was 16 sen for FY18F.

• The date of Magnum’s court hearing date in respect of its tax penalty of RM477.1mil is 20 September 2018. If Magnum loses the case, the tax penalty of RM477.1mil would erase the entire year’s net profit and 19% of shareholders’ funds (as at end-FY17).

• Magnum’s net profit improved by 13.8% YoY to RM103.0mil in 1HFY18 on the back of a lower prize payout ratio. We estimate Magnum’s prize payout to be 64.4% in 1HFY18 vs. 65.5% in 1HFY17.

• Ticket sales per draw edged down by 0.4% YoY in 1HFY18. There were 89 draws each in 1HFY18 and 1HFY17. On a quarterly basis, the number of draws declined from 46 in 1QFY18 to 43 in 2QFY18. Comparing 2QFY18 against 1QFY18, Magnum’s net profit declined by 12.5% to RM48.1mil. This was due to a 15.7% fall in revenue.

• Ticket sales per draw were weak in 2QFY18. After rising by 2% YoY in 1QFY18, gross ticket sales per draw slid by 9.9% QoQ and 3.2% YoY in 2QFY18. Magnum’s ticket sales were affected by the general election in May and FIFA World Cup in June in 2QFY18.

Source: AmInvest Research - 27 Aug 2018