2Q17 results were largely in line as the luck factor normalised while a slight positive was the ticket sales recording the best performance for a non-CNY quarter in a year. While it is still early to conclude a recovery in ticket sales, we believe the decline should have bottomed. The stock looks attractive at its multi-year low of 11x CY18 PER after being heavily sold down, which declined 19% in the past three months, following the announcement of a RM476m tax penalty claim. As such, we upgrade MAGNUM to OUTPERFORM at unchanged target price of RM2.17/DCF share with dividend yield of 6%-7%.

2Q17 in line. At 45%/49% of house/street’s FY17 estimates, 1H17 net profit of RM90.6m came within expectations as 2H17 should be better than 1H17 given 1Q17 results were hit by the extreme poor luck factor of 71.5% against the theoretical level of 66%. It declared 1st interim NDPS of 3.0 sen (ex-date: 13 Sep; payment date: 29 Sep) in 2Q17, against a total of 7.0 sen paid in 1H16.

Earnings boosted by the good-luck factor. After an extremely poor luck factor in 1Q17, a 3ppt lower than the theoretical pay-out ratio (EPPR) of 63.0% boosted 2Q17 net profit strongly by 96% QoQ to RM60.0m from RM30.6m previously. This favourable luck factor is reflected in its NFO PBT margin of 15% from 6% in 1Q17. However, 2Q17 revenue fell 11% largely due to lower NFO ticket sales by 11% to RM620.3m as it had only 43 draws in 2Q17 as opposed to 46 draws previously while the average ticket sales per draw slid 5% to RM15.7m from the CNY-led 1Q17 of RM16.5m.

Best ticket sales in a year. YoY, 2Q17 net profit jumped 175% YoY from RM21.8m in 2Q16 as the luck factor in the corresponding quarter was extremely low as well at 73.0% with ticket sales dipping 1% due to less draw days of 43 draws compared to 44 draws last year. However, average ticket sales improved 1% from RM15.5m and in fact, 2Q17 average ticket sales of RM15.7m per draw was the best non-CNY quarter in a year. YTD, 1H17 net profit was flattish at RM90.5m against RM90.7m last year despite a 4% decline in revenue. This was largely attributable to better EPPR of 67.5% from 68.4%. The fall in revenue was due to lower draw days of 89 vs. 91 last year coupled with 2% drop in average ticket sales per draw of RM16.1m from RM16.5m in 1H16.

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 better 2Q17 ticket sales is still too early a sign to conclude a recovery, but we believe it should have bottomed. Nonetheless, 2H17 is likely to be stronger than 1H17 as we expect EPPR to normalise after 1Q17 was hit by the extreme poor luck factor. For now, we keep our FY7-FY18 estimates unchanged.

Upgrade to OUTPERFORM. While declining earnings are likely to have bottomed, the RM476m tax penalty issue is a new overhanging issue on its share price. However, after the sell-down following the tax penalty issue announcement three months ago, the share price of MAGNUM has contracted 19% which appears fairly attractive as the stock trades at multi-year low of 11x CY18 PER. As such, we upgrade the stock to OUTPERFORM with unchanged price target of RM2.17/DCF share. Downside risks to our upgrading call include the persistent poor luck factor as well as continued sluggish ticket sales.

Source: Kenanga Research - 24 Aug 2017