The extension of MCO to mid-Apr for a total of eight weeks will cancel 12 draws which leads to an 8% cut in our FY20E estimates. But, we may see additional special draws in the near future to raise tax revenues for the government in this difficult time, although it will not be earnings enhancing for the operator. We still see value in MAGNUM after a 30% YTD contraction but an ideal entry point is RM1.60. Thus, we keep OP but with a lower TP of RM1.95 which is supported by >6% yield.

MCO to extend for another two weeks. Following PM’s announcement yesterday on the extension of Movement Control Order (MCO), MAGNUM outlets will remain closed until 14 April 2020. As such, all 12 draws from 18 March to 14 April have been cancelled. Based on our FY20 ticket sales assumption of RM18.1m per draw, there will be a loss of RM217m ticket sales in these four weeks. Given the depressed market condition, our 3% ticket sales growth per draw assumption of RM18.1m for FY20 looks challenging. Thus, we reduce our growth assumption to 2% or RM17.9m per draw. We also lowered FY21 ticket sales growth assumption to 2% from 3% previously.

FY20 estimates to reduce by 8%. With the new ticket sales assumption of 2% per draw and total draws for FY20 reduced to 154 from our previous assumption of 166, and unchanged estimated prize payout ratio (EPPR) of 65%, we cut FY20E forecast by 8.2% while FY21E estimate is also slashed slightly by 1.9% on ticket sales growth of 2%, although there are no changes in assumptions of 166 draws. On the other hand, although there are 12 less draws for the year, we may see higher special draws from eight currently given that the purpose of special draws is for emergency events and COVID-19 is a good reason to have extra special draws to raise tax revenues for the government. However, special draw has minimal earnings enhancement to the NFO operators as it comes with additional 10% tax.

PBV to value the stock. Share price of MAGNUM was not affected by the COVID-19 outbreak initially as the stock was hovering around 9% below its 52-week high of RM2.90 throughout Dec 2019 to Feb 2020 but the order of MCO which started on 18 March escalated the sell down and push the stock to its 52-week low of RM1.70 last week which was 41% from the peak. Given the depressed business environment due to restricted business activities, earnings prospect is challenging and hard to forecast in the near term, we believe PBV valuation methodology is more appropriate to apply in the current market condition. MAGNUM and its peer BJTOTO both are now trading closer to their 1.5SD below its 5-mean of PBV. Under the current environment, we will place -1SD as the fair value level while the ideal buying zone should be at -2SD assuming a level of full-blown financial crisis.

Maintain OUTPERFORM as sell-down is overly done. We cut our target price to RM1.95 which is based on 1.12x PBV or -1SD PBV 5- year mean from RM2.75/DCF share as we change to our new valuation method. In our opinion, its valuation looks fairly attractive after a severe 30% YTD sell-down against BJTOTO of 16%. In addition, it also offers above average yield of >6%. As such, we maintain our OUTPERFORM rating. However, given the market volatility, an ideal entry point is placed at RM1.60 which is based on 0.92x PBV or -2SD 5-year mean.

Risk to our call is a prolonged COVID-19 outbreak which will derail economic recovery.

Source: Kenanga Research - 26 Mar 2020