2QFY20 results missed expectations as it turned to the red due to cancellation of 34 draws on MCO-led business closure. Nonetheless, with business re-opened from 17 Jun, the dismal 2QFY20 result is seen as an isolated event with recovery expected henceforth. However, we continue to rate the stock MP with revised TP of RM2.20 as near-term positives are seen to be priced in.

2QFY20 below expectations. 2QFY20 turned to the red at -RM23.7m which missed expectations, bringing 1HFY20 net profit to RM31.9m, which accounted for only 17%/19% of house/street’s FY20 estimates. The disappointing results were largely due to losses attributable to MCO-led business closure. Meanwhile, like its peer BJTOTO (OP; TP: RM2.40), MAGNUM also declared a share dividend distribution, of 14.23m treasury shares on the basis of 1-for-100, implying book cost of 2.04 sen (ex-date: 11 Sep), bringing 1HFY20 total NDPS to 4.54 sen vs. 9.0 sen paid in 1HFY19.

Results in the red… It turned to net loss of RM23.7m in 2QFY20 from net profit of RM55.6m in the preceding quarter as revenue plunged 92% to RM50.6m after the cancellation of 34 draws during the quarter due to MCO-led lockdown. There were only six draws in 2QFY20 against 36 draws in 1QFY20. Besides, average ticket sales per draw also declined 50% to RM9.2m from RM18.4m. Meanwhile, estimated prize pay-out ratio (EPPR) was at 65.7% vs. 64.5% in the preceding quarter.

…due largely to MCO closure. YoY, 2QFY20 losses plunged from RM74.4m net profit in 2QFY19 as top-line plummeted 92% from RM666.4m. There were 41 draws conducted in 2QFY19 while the average ticket sales per draw was RM17.7m with a better luck of EPPR at 62.3% last year. YTD, 1HFY20 net profit slumped 76% to RM31.9m from RM134.4m while revenue contracted by 54% to RM660.1m from RM1.42b. The main culprit of this dismal result was the total cancellation of 40 draws on MCO-led lockdown. There was only 42 draws in 1HFY20 vs. 83 draws previously while average ticket sales per draw fell 8% to RM17.1m from RM18.6m. This led to a 54% decline in total ticket to RM717.4m from RM1.55b. EPPR was higher at 64.6% from 63.8% in 1HFY19.

A better 2HFY20 as business restarted. Since re-opening business on 17 Jun, ticket sales have slowly picked up. We estimated that currently ticket sales have recovered to 80% of pre-MCO period and it should improve further as economy picks up further. Nonetheless, we cut our ticket sales per draw growth assumption from +2%/+2% at RM18.0m/RM18.3m in FY20/FY21 to -10%/+5% at RM15.8m/ RM16.6m while other key assumptions remain unchanged. As such, we cut FY20/FY21 estimates by 27%/9% while NDSP is also trimmed proportionally based on unchanged pay-out of 80%.

Maintain MARKET PERFORM. Its business operations have already resumed, and although ticket sales has not fully recovered, upcoming quarterly results are expected to improve further. Nonetheless, we believe near-term catalyst is already priced in at the moment. As such, we continue to rate the stock as MARKET PERFORM with a lower target price of RM2.20/DCF share from RM2.45/DCF share post earnings revision. Our call is supported by a decent yield of <4% despite a big 27% cut in earnings. Risk to our recommendation is a quicker-than-expected recovery of ticket sales

Source: Kenanga Research - 27 Aug 2020