Headline 3Q18 net loss of RM70.5m was impacted by a tax penalty settlement. However, core earnings doubled from the previous quarter due to luck factor and tax holiday effect. Besides, falling ticket sales have stabilised with slight improvement, which suggest a bottom. Meanwhile, impact of special draw cut is minimal at c.2% to the bottom- line while the reintroduction of SST is just a replacement for GST. Maintain OUTPERFORM at RM2.25/DCF share.

9M18 results on track. At 81% of both house/street’s FY18 estimates, we consider 9M18 core profit of RM174.9m to be within expectations given that the solid 3Q18 results were attributed to extreme good-luck factor, which is unlikely to repeat in 4Q18 and the one-off 3-month zero-rated GST effect in Jun-Aug across 2Q18-3Q18. As such, 4Q18 is likely to be a sequentially weak quarter. Meanwhile, it declared a 3rd interim NDPS of 4.0 sen (ex-date: 13 Dec; payment date: 28 Dec) in 3Q18, totalling 9M18 NDPS to 11.0 sen which is higher than 7.0 sen paid in 9M17.

3Q18 boosted by luck factor and zero-rated tax period. Headline net loss of RM70.5m was shocking. However, this was due to the settlement with Inland Revenue for the one-off tax penalty amounting to (i) RM100.2m recognised in income tax expense and (ii) RM42.2m reflected in the Investment Holdings and Others Segment. Ex-EI, 3Q18 core profit jumped 50% to RM71.9m from RM48.1m in 2Q18 due mainly to luck factor as the prize payout ratio (EPPR) came way below the theoretical level of 66% at 63.2% while the NFO enjoyed a zero- rated GST period which previously MAGNUM had to absorb the 6% GST. Besides, total ticket sales grew 11% to RM725.1m largely due to higher draws of 47 vs. 42 previously with average ticket sales per draw dipping slightly to RM15.4m from RM15.5m previously.

Stabilised ticket sales trend is encouraging. Similarly, better 3Q18 and YTD 9M18 results which both rose 14% to RM71.9m and RM174.9m were largely attributed to the same reasons on luck factor and improved ticket sales. EPPR was almost 1ppt higher at 64.3% in 3Q17 while the luck factor in 9M18 was lower at 65.3% as opposed to 66.4% last year while average ticket sales per draw improved by 2% in 3Q18 and 1% in 9M18. As such, total ticket sales rose 2% from 3Q17 for the same draw days at 47 while ticket sales were flattish in 9M18 as the higher average ticket sales negated lower draw days of 135 vs. 136 in 9M17.

Minimal impact on special draw cut; neutral impact on SST. Like its arch rival, BJTOTO (OP; TP: RM2.65), the special draw cut by 50% should have minimal earnings impact of 2-3% given that these special draws come with 10% additional tax which crimp profitability while the reintroduction of SST should also have neutral impact to the NFO player as it is just a replacement of GST. Meanwhile, although 3Q18 results were solid, we keep our estimates unchanged as we expect luck factor to normalise in 4Q18 while the tax holiday in Jun-Aug is an one-off event.

Keep OUTPERFORM. We maintain our view that the worst is over for ticket sales declining trend as both NFO players had shown the same bottoming-out ticket sales pattern in the past one year. In addition, the settlement of tax dispute with Inland Revenue had cleared the overhang issue which is good for sentiment. As such, we continue to rate the stock OUTPERFORM, which is supported by an above average yield of c.6% with a target price of RM2.25/DCF share.

Risks to our call include (i) poorer luck factors as well as (ii) sluggish ticket sales.

Source: Kenanga Research - 28 Nov 2018