While 1Q18 result matched expectations, the 2nd straight quarter of YoY improvement in ticket sales showed that the downtrend should have bottomed. Luck factor has also normalised for almost a year. In addition, the zero-rated GST should be good news which prompted a price rally over the past two weeks. Even then, valuation remains at - 0.5SD 3-year mean. We maintain OUTPERFORM rating with a revised target price of RM2.30/DCF share.

1Q18 matched expectations. At 25% of both house and street’s FY18 estimates, 1Q18 net profit of RM54.9m came within expectations. It declared a first interim NDPS of 4.0 sen (ex-date: 13 June; payment date: 29 June) in 1Q18 which is the same as 4.0 sen paid in the preceding quarter but there was no dividend declared in 1Q17.

Sequential results led by CNY-effect. 1Q18 net profit rose 4% to RM54.9m from RM52.8m in the preceding quarter on the back of 6% hike in revenue to RM712.4m from RM675.1m previously. The improved results were largely driven by higher NFO ticket sales by 6% to RM774.3m from RM733.4m but mitigated by the normalisation of estimated prize payout ratio (EPPR) to 66.1% from 64.7%. The higher ticket sales, despite lower draws of 46 from 47, was attributable to CNY-effect which saw its average ticket sales per draw grew 8% to RM16.8m from RM15.6m. Furthermore, note that in the previous quarter, effective tax rate was higher at 38% as opposed to 30% in 1Q18.

2nd conservative YoY ticket sales improvement. YoY, 1Q18 net profit surged 80% from RM30.6m in 1Q17 as the latter results were badly impacted by the extremely poor luck factor of 71.5%, which resulted gaming’s PBT margin falling sharply to 6% as compared to 12% achieved in 1Q18. It also worth highlighting that ticket sales registered 2nd straight quarter of YoY improvement by 2% from RM757.7m in 1Q17 to RM774.3m in 1Q18 with unchanged 46 draws while average ticket sales per draw inched up 2% from RM16.5m.

Ticket sales stabilised; to benefit from GST removal. In the past year, MAGNUM managed to post stable ticket sales with an improving trend while luck factor has normalised except for 1Q17, which was badly hit by high EPPR. As such, we believe the declining trend should have bottomed. On the other hand, the reduction of GST to 0% effective 01 June should bode well for the NFO operators as the players have been absorbing the 6% tax since the implementation in April 2015. Thus, the 6% saving is likely to go straight to its bottom-line if the industry is not imposed with Sales & Service Tax (SST). The industry was exempted from SST prior to the implementation of GST.

Still OUTPERFORM. After a 5-year downtrend, MAGNUM’s share price finally rose 22% YTD, especially in the past two weeks after the new government’s announcement of zero-rated GST. As we are not certain if the industry is exempted from the new SST, we decided to keep our forecast unchanged for now. Even at the current level, the stock is trading at -0.5SD from the 3-year mean which is fairly attractive. As such, we continue to rate MAGNUM an OUTPERFORM with a higher target price of RM2.30/DCF share from RM2.20/DCF share after we rolled over the valuation base-year to CY19. Risks to our call include poorer luck factors as well as sluggish ticket sales.

Source: Kenanga Research - 22 May 2018