After a solid CNY-led 1Q16, MAGNUM reported a dismal set of 2Q16 results which saw earning falling 68% sequentially, no thanks to unfavourable luck factor, which jumped 84ppt. Nonetheless, ticket sales were well on track. Going forth, we are cautious as the luck factor remains a deciding factor to its fortune. Nonetheless, downside to share price is limited, in our view, as it trading at multiple-year lows. In addition, it offers an attractive yield of 5%-6%. We maintain our OUTPERFORM call at revised price target of RM2.78/DCF share.

2Q16 fell short of forecasts. At 34%/37% of house/street’s FY16 estimates, 1H16 net profit of RM90.7m came way below expectations owing to poor luck factor as prize pay-out ratio (EPPR) was 68.4% as opposed to our FY16 assumption of 65.0%. This was attributable to the unlucky EPPR of 73.0% in 2Q16. A 2nd interim NDPS of 3.0 sen was declared in 2Q16 (ex-date: 13 Sep; payment date: 30 Sep), lower than 4.0 sen and 5.0 sen paid in 1Q16 and 2Q15, respectively. This brings 1H16 NDPS to 7.0 sen which is lower than the 10.0 sen paid in 1H15.

Luck factor and weak ticket sales led earnings lower. Sequentially 2Q16 net profit plunged 68% to RM21.8m from RM68.8m in 1Q16 as revenue contracted 17% over the quarter. This was mainly attributable to: (i) higher EPPR of 73.0% vs. 64.6%, and (ii) a 17% decline in ticket sales. The drop in ticket sales is not unexpected as the strong 1Q16 was due to CNY effect while 2Q16 had fewer draw days of 44 from 47 previously. Thus, average ticket sales per draw fell 11% to RM15.5m from RM17.4m in 1Q16.

Same reasons for weak YoY results. Similarly, 2Q16 net profit plummeted 64% from RM59.8m in 2Q15 while top line fell 3% from last year. The EPPR in 2Q15 was below the 66% theoretical level of 64.1% vs. extremely high level of 73.0% in 2Q16. The fall in ticket sales of 3% was due to 2Q15 having one month of pre-GST period after which ticket sales was net of 6% tax from 1 Apr 2016 onwards. 2Q16 had the same draw days of 44 with 2Q15, but average ticket sales per draw fell 3% from RM16.0m in 2Q15. YTD, 1H16 earnings declined 40% to RM90.7m from RM150.6m while revenue fell 4% as average ticket sales dipped 6% to RM16.5m from RM17.6m previously. Again, EPPR was the main culprit of weak earnings, which rose to 68.4% in 1H16 from 62.7% in 1H15.

It is all about the 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 bottom line. 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.

Keep OUTPERFORM. Post 2Q16 results, we trimmed FY16 estimates by 15% solely on higher assumption of EPPR to 67% from 65% while ticket sales assumption remains unchanged. We make no changes to FY17 forecast where EPPR assumption is 65%. Thus, our CY17 valuationbase price target is reduced slightly to RM2.78/DCF share from RM2.80/DCF share. Despite a weaker set of 2Q16, we still keep our OUTPERFORM call as its valuation remains undemanding as well as attractive yields of 5%-6%. Risks to our call include: (i) higher-thanexpected EPPR, (ii) weaker-than-expected ticket sales, and (iii) rise in gaming tax.

Source: Kenanga Research - 19 Aug 2016