MAGNUM saw its first annual earnings growth in FY17 since 2012 with the abating ticket sales downtrend after several quarters of sustainable sales. Therefore, the worst could be over for now. The only issue is the RM476m tax penalty issue which is an overhang on shares. It remains OUTPERFORM with a revised target price of RM2.20/DCF share. It also offers an attractive dividend yield of c.6%.

FY17 within expectations. At 103%/105% of house/street’s estimates, FY17 net profit of RM206.6m came within both our as well as market expectations. it declared 3rd interim NDPS of 4.0 sen (ex-date: 13 Mar; payment date: 30 Mar) in 4Q17, tallying FY17 NDPS to 11.0 sen, which is in line with our 11.2 sen projection, against 13.0 sen paid in FY16.

4Q17 sequential results hit by higher taxation. Despite revenue growing 3%, 4Q17 net profit fell 17% QoQ to RM52.8m from RM63.3m, largely due to higher taxation by RM10.2m as the effective tax rate surged to 38% from 26%. On the flipside, the increase in revenue was owing to higher NFO ticket sales by 3% as average ticket sales per draw also rose 3% to RM15.6m from RM15.2m with unchanged draw days of 47. Meanwhile, it managed to maintain profit margin as the prize pay-out ratio (EPPR) remained attractive at 64.7% from 64.3% previously.

Better luck factor than last year. YoY, 4Q17 and FY17 net earnings rose 20% and 9% from RM44.0m and RM189.7m, respectively, largely due to good luck factor as the EPPR declined from 66.2% in 4Q16 while in FY17 it fell to 66.0% from 67.3% previously. In fact, the higher percentage jump in 4Q17 was also attributed to higher ticket sales by 6% as average ticket sales per draw improved significantly from RM14.7m. Meanwhile, ticket sales for FY17 remained flattish with overall average ticket sales virtually maintained at RM15.7m from RM15.8m previously.

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, after a slight drop in average ticket sales in 3Q17, 4Q17 saw improving ticket sales again. As such, we believe the declining trend should have bottomed. We believe our estimates are achievable and we expect market to upgrade earnings further, which is positive for share price sentiment. For now, we keep our FY18 estimates unchanged while introducing new FY19 forecast with 2.5% earnings growth.

Reiterate OUTPERFORM. So far, the declining earnings trend has abated with sustainable ticket sales which we believe is a positive sign. Meanwhile, the sell-down had already abated with the share price recovering 14% YTD after the stock was traded at multi-year low PER of 11x on CY18 three months ago. Even then, it is currently trading at prospective CY18 PER of 12.9x which is not excessive as it also offers yield of c.6%. The stock remains an OUTPERFORM with a higher price target of RM2.20/DCF share from RM2.17/DCF share after an adjustment post the FY17 numbers. Risks to our call include poor luck factor as well as sluggish ticket sales.

Source: Kenanga Research - 28 Feb 2018