- Maintain HOLD on Magnum Bhd with an unchanged DCFbased fair value of RM3.45/share. Magnum is currently trading at an FY14F PE of 15.4x and FY15F PE of 15.2x versus Berjaya Sports Toto’s PEs of 13.6x to 14.2x.

- Magnum has declared another gross DPS of 5 sen. This brings total gross DPS to 10 sen for 1HFY14. For FY14, we have forecasted a gross DPS of 20 sen, which implies a yield of 6.6% and net payout of 101%.

- We believe that Magnum would be able to sustain its dividend payments due to a positive free cash flow of 20.8 sen/share estimated for FY14F.

- Magnum’s 1HFY14 results were below our earnings forecast and consensus estimates. We have reduced Magnum’s FY14F earnings forecast by 11.1% to account for a higher-than-expected effective tax rate.

- On a QoQ basis, Magnum’s net profit declined by 17.6% to RM68mil in 2QFY14 as turnover fell by 12.1%. Ticket sales were sluggish in 1HFY14.

- In its results announcement, management said that increases in the interest rate and cost of living are expected to dampen sales. This is envisaged to be compounded by aggressive discounts and higher prize payouts by the illegal operators.

- We also reckon that young working professionals are more attracted to online betting, sports betting and jackpot games, which have the potential to pay out higher prize monies, compared to the traditional lottery games.

- Magnum’s ticket sales declined by 3.7% YoY to RM1.5bil in 1HFY14. Gross ticket sales contracted by 3.7% from RM18.7mil per draw in 1HFY13 to RM18mil per draw in 1HFY14.

- Comparing 2QFY14 with 1QFY14, gross ticket sales slid 12.1% to RM696.3mil. Ticket sales were stronger in 1QFY14 due to the Chinese New Year festive period.

- We estimate the prize payout at 64.0% in 1HFY14 against 62.4% in 1HFY13. The higher prize payout coupled with the weak topline growth resulted in the NFO pre-tax profit shrinking by 18.0% from RM248.2mil in 1HFY13 to RM203.6mil in 1HFY14.

- On a QoQ basis, the prize payout was at about 65.4% in 2QFY14 versus 62.8% in 1QFY14.

Source: AmeSecurities