1Q16 results which came in within expectations witnessed a strong CNY-led ticket sales and normalisation of luck factor after two quarters of unfavourable luck. Going forward, we are cautious as the luck factor remains as a deciding factor to its earnings. Nonetheless, downside to share price is limited, in our view, as it trades at multiple-year lows. Furthermore, it offers an attractive yield of 6%. We maintain our OUTPERFORM call at new price target of RM2.80/DCF share.

1Q16 inline. MAGNUM reported an improved set of 1Q16 results which came within expectations with net profit of RM68.8m making up 26%/28% of house/street’s FY16 estimates. The improved set of results was after two quarters of unfavourable luck factors previously. A 1st interim NDPS of 4.0 sen was declared in 1Q16 (ex-date: 08 Jun; payment date: 24 Jun) as opposed to 3.5 sen and 5.0 sen paid in 4Q15 and 1Q15, respectively.

Sequential results led by ticket sales and luck. A remarkable recovery of net profit in 1Q16 by 74% QoQ to RM68.8m from RM39.5m in the preceding quarter 1Q15 while revenue rose 13% to RM752.6m from RM668.4m previously. The strong ticket sales were primary attributable to: (i) CNY seasonality, which led to 8% hike in average ticket sales per draw to RM17.4m from RM16.1m, and (ii) extra two draw days in 1Q16 to 47 from 45 which brought total sales to RM818.0m from RM726.5m. Meanwhile, luck factor also normalised to 64.6% from 68.3% in 4Q16.

… but not good enough as last year. However, the Y-o-Y comparison results for 1Q16 was lower than that of 1Q15 with net income contracting 24% from RM90.8m as revenue fell 5% from RM791.3m. This was also due to two main factors: ticket sales and luck factor. 1Q16 total ticket sales declined 5% from RM860.0m due to ticket sales being net of 6% GST since Apr 2015 while 1Q15 was in pre-GST period. Adjusting for the 6% tax, ticket sales would have inched up slightly by 1%. However, on average ticket sales per draw basis, 1Q16 number fell 9% from RM19.1m or slid 3% on GST adjustment. This was mainly due to 1Q15 having lesser draw days of 45 vs. 47 in 1Q16. On the other hand, 1Q15 luck factor was extremely low at 61.5%.

It is all about luck factor. While the luck factor remains the deciding factor as the prize payout ratio is inconsistent from quarter to quarter, the implementation of GST will add cost due to absorbing the 6% tax which crimps bottomline. On the other hand, it managed to launch a new game, 4D Powerball Jackpot game in end-Jan, which is a positive as it was done without replacing any existing games. However, the flipside is prize payout ratio for jackpot is more vulnerable than 4D games.

Reiterate OUTPERFORM. No changes to FY16-FY17 estimates which we assumed 65% EPPR and 24% effective tax rate as opposed to 65.7% EPPR and 30.3% effective tax rate in FY15. We are rolling over our valuation base-year to CY17, thus our new price target is RM2.80/DCF share from RM2.90/share. We keep our OUTPERFORM call unchanged as the stock also offers an attractive net yield of 6%. Risks to our call include: (i) rise in gaming tax, (ii) weaker-than-expected ticket sales, and (iii) higher-than-expected EPPR.

Source: Kenanga Research - 27 May 2016