While its FY16 report card is within expectations, we are downgrading MAGNUM to MARKET PERFORM as there is no sign of recovery in ticket sales. In fact, the average ticket sales per draw are declining each quarter to new record lows where 4Q16 number was 9% lower than a year ago. And, we still expect it to trend lower in FY17 by another 2% before picking up 1% in FY18. In all, we cut FY17 estimates by 13% with price target reduced to RM2.30/share.

FY16 in line. MAGNUM reported 4Q16, which came within expectation with FY16 core earnings of RM196.6m coming 5% below our estimate and on the dot of market consensus. A 4th interim NDPS of 3.0 sen was declared in 4Q16 (ex-date: 10 Mar; payment date: 30 Mar), totalling FY16 NDPS to 13.0 sen which was lower than the 16.0 sen paid in FY15.

A weaker sequential result. 4Q16 net profit declined 18% sequentially to RM45.1m from RM55.0m with revenue falling 2% to RM634.3m from RM647.2m. The decline in earnings was owing to higher tax expense, which included an additional tax expense of RM5.8m for under-provisions in prior years. Operational-wise, 4Q16 top-line fell 2% in tandem with the ticket sales trend which fell 2% although there was two extra draw days to 47 from 45 in 3Q16 as average ticket sales per draw contracted 6% to RM14.7m from RM15.6m. Nonetheless, estimated prize pay-out ratio (EPPR) was maintained at normalised level at 65.8% from 65.9%.

YTD numbers still declining. Compared to the same quarter last year, 4Q16 earnings improved 14% from RM39.5m largely attributable to better luck factor of 65.8% as opposed to 68.3% recorded in 4Q15 despite weaker NFO sales by 5% as average ticket sales per draw fell another 9%. That said, FY16 net profit plunged another 19% to RM190.8m from RM228.1m as ticket sales fell 4% while the luck factor deteriorated to 67.2% from 65.7%. In fact, FY16 had more draw days of 183 compared to 178 conducted in FY15.

It is all about the luck factor and ticket sales. While the luck factor remains the deciding factor as the prize pay-out ratio is inconsistent from quarter to quarter, the declining ticket sales trend is not helping either. However, there could be some positives for NFO players like MAGNUM as the Deputy Prime Minister had stated in the middle of this month that the Common Gaming Houses Act 1953 will be amended to combat online gambling. As illegal operators have been taking market share away from the NFO players, any new act is welcomed to deter gamblers switching to the black market.

Cut to MARKET PERFORM. With the continued declining ticket sales quarter after quarter, we decided to trim assumptions and we now expect total ticket sales in FY17 to decline by c.2% before recovering to 1% growth in FY18. We also raised our EPPR assumption to 66% from 65%. Thus, we slashed FY17 estimates by 13% and introduced new FY18 forecast with only 1% earnings growth. We are now downgrading the stock to MARKET PERFORM from OUTPERFORM with a lower price target of RM2.30/DCF share from RM2.52/DCF share previously. Risks to our downgrading call include a sudden strong recovery of ticket sales as well as better luck factor.

Source: Kenanga Research - 24 Feb 2017