MAGNUM continued to deliver a disappointing set of results in 1Q17 as bottomline was hit by extreme poor luck factor while the CNY-quarter did not see recovery in ticket sales. In addition, for the first time since 2013, it did not declare any interim dividend in 1Q17. Worst still, the group is now facing a RM476m tax penalty claim. All these are not helping its suppressed share price. We maintain MARKET PERFORM on the stock with revised price target of RM2.17/DCF share.

Disappointing 1Q17. MAGNUM 1Q17 results fell short of expectations with net earnings of RM30.6m making up 14% of both house and street’s FY17 full-year estimates, on the back of extreme poor luck factor again as the estimated prize payout ratio (EPPR) in 1Q17 was 71.5% against our FY17 assumption of 66%. On another negative note, there was no dividend declared in 1Q17, after consistently distributing dividends every quarter since FY13.

Hit by luck factor yet again. 1Q17 net profit plunged 32% QoQ to RM30.6m despite revenue rising 10%, which was led by CNY factor. The sharp decline in earnings was largely due to luck factor as EPPR deteriorated to 71.5% from the theoretical level of 65.8% in 4Q16. The CNY effect saw its ticket sales per draw rising 12% to RM16.5m from RM14.7m previously. In fact, 1Q17 had 46 draw days as opposed to 47 draw days in 4Q16.

Ticket sales not recovering either. On yearly comparison, 1Q17 net earnings contracted 56% from RM68.8m as revenue declined 7% from 1Q16. Besides EPPR deteriorated from 64.6%, the poor set of results was also attributed to decline in ticket sales by 7% due to (i) one draw lesser than 47 in 1Q16, and (ii) average ticket sales fell 5% from RM17.4m. This shows that the sluggish ticket sales have not recovered.

Hit by RM476m tax penalty? Last Friday, MAGNUM announced that together with its wholly-owned Magnum Holdings Sdn Bhd, they were served with notices of assessment with a total penalty of RM476.6m for the year of assessment between 2008 and 2015 by the Director General of Inland Revenue. Both have appointed solicitors and are initiating proceedings to challenge the validity and legality of the notices of assessment.

Outlook is all about the luck factor and ticket sales. While the luck factor remains the deciding factor as the EPPR is inconsistent from quarter to quarter due to its concentration on the 4D games, the declining ticket sales trend is not helping either. In addition, 2Q17 ticket sales are expected to decline further sequentially after the seasonal strong CNY effect in 1Q17. Meanwhile, we have trimmed FY17 estimates by 8% after lowering EPPR assumption to 67% from 66% but FY18 forecast unchanged.

Going remains tough; MP maintained. With the continued declining ticket sales trend coupled with volatile luck factor, prospects of MAGNUM look fairly gloomy. Furthermore, the RM476.6m tax penalty is not helping its already suppressed share price either as its net profits are forecasted to be RM200m-RM220m in the next two years. As such, we remain MARKET PERFORM on MAGNUM with revised price target of RM2.17/DCF share from RM2.30/DCF share post-earnings revision and rolling over our valuation to CY18 from CY17. Downside risks to our call include persistent poor luck factor as well as continued sluggish ticket sales.

Source: Kenanga Research - 22 May 2017