While results matched our forecast, the 3Q17 results which beat consensus is positive to sentiment as the market could have been expecting lacklustre results. We believe the declining ticket sales trend and selling pressure on its share should have already bottomed out. It is also trading attractively at multi-year low of 11x CY18 PER. Hence, we reiterate OUTPERFORM with unchanged price target of RM2.17/DCF with dividend yields of 6-7%.

Results matched expectations. At 77%/84% of house/street’s FY17 estimates, 9M17 net profit of RM153.8m came within our expectation but beat market consensus. We believe that the market could have expected weaker luck factor and NFO sales which MAGNUM experienced in 1Q17. It declared 2nd interim NDPS of 4.0 sen (ex-date: 14 Dec; payment date: 29 Dec) in 3Q17, totalling 9M17 NDPS to 7.0 sen against a total of 10.0 sen paid last year.

Earnings boosted by higher draw days. 3Q17 net profit of RM63.3m rose 6% from RM60.0m in 2Q17 on the back of 6% growth in top-line. This was largely due to higher NFO ticket sales by 6% to RM713.5m as it had higher 47 draws from 43 draws in the preceding quarter. On the flipside, average ticket sales per draw fell 3% to RM15.2m from RM15.7m previously while prize pay-out ratio (EPPR) dropped to 64.3% from 63.0%. However, the EPPR is still below the theoretical level of 66%.

Better luck factor than last year. YoY, 3Q17 net earnings rose 15% from RM55.0m in 3Q16 while revenue inched up by 1% over the year. The earnings were primarily led by better luck factor from 65.9% and slight improvement in ticket sales by 1% on two extra draws from 45 in 3Q16. In fact, average ticket sales per draw fell 3% from RM15.6m. YTD, 9M17 net income grew 6% from RM145.7m although revenue declined 3% as ticket sales fell 3% from last year. This improvement in earnings was attributable to better luck factor at 66.4% from 67.6% in 9M16. In fact, average ticket sales per draw fell 3% to RM15.8m from RM16.2m previously with the same numbers of draws of 136.

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 4D games, the slight drop in average ticket sales in 3Q17 is not that severe. But we believe the declining trend should have bottomed. We believe our estimates are achievable and we expect market to upgrade earnings which is positive for share price sentiment. For now, we keep our FY17-FY18 estimates unchanged.

Maintain OUTPERFORM. While the declining earnings trend is likely to have bottomed, the RM476m tax penalty issue is a new overhanging issue over its share price. On the other hand, the sell-down has somewhat abated in the last three months which could imply the negativity had bottomed out as it is now trading at multi-year low of 11x CY18 PER. As such, we maintain our OUTPERFORM rating with unchanged price target price of RM2.17/DCF share. Risks to our call include poor luck factor as well as sluggish ticket sales.

Source: Kenanga Research - 30 Nov 2017