- Maintain HOLD on Magnum Bhd with an unchanged DCFbased fair value of RM3.00/share. Our fair value implies an FY16F PE of 17.3x. Magnum’s 1HFY15 results were within our expectations and consensus estimates.

- Magnum declared a gross DPS of 5 sen in 2QFY15, which brings total gross DPS to 10 sen in 1HFY15 (1HFY14: 10 sen). We have forecast a gross DPS of 15 sen for Magnum in FY15F (FY14: 20 sen), which implies an attractive yield of 5.9%.

- After a decent 1QFY15, Magnum’s net profit fell by 34.1% QoQ to RM59.8mil in 2QFY15 due to the cost of GST (Goods and Services Tax) and a contraction in ticket sales.

- Comparing 2QFY15 against 1QFY15, ticket sales declined by 17.0% to RM714.1mil. On a per draw basis, gross ticket sales slid by 15.1% QoQ in 2QFY15. There were 44 draws in 2QFY15 versus 45 draws in 1QFY15.

- We attribute the QoQ slide in ticket sales in 2QFY15 to the fall in consumer spending resulting from the implementation of GST. Apart from this, the NFO industry was affected by competition from the illegal operators.

- Magnum’s ticket sales inched down by 2.7% YoY to RM1.4bil in 1HFY15. Gross ticket sales per draw slid by 1.6% from RM18.0mil in 1HFY14 to RM17.7mil in 1HFY15. There were 89 draws in 1HFY15 versus 90 draws in 1HFY14.

- We estimate prize payout at 62.8% in 1HFY15 versus 64.0% in 1HFY14.

- We have assumed that Magnum’s ticket sales per draw would decline by 4% in FY15F (FY14: -4.0%). Ticket sales per draw are forecast to be flat in FY16F. We reckon that it would take six months before consumer spending normalises.

- In spite of four new games being introduced since November 2014, we believe that the NFO industry would remain in the doldrums this year.

- Apart from competition from illegal operators and impact of the GST, we think that structural changes such as a younger population, who favour jackpot more than the traditional lottery games, would affect ticket sales in the long-term.

Source: AmeSecurities Research - 19 Aug 2015