1HFY22 results fell short of expectations due to a slower than-expected recovery in ticket sales (at about 71% of pre COVID-19 levels) coupled with an abnormally high prize payout ratio of close to 70% (vs. theoretical 67%). We cut our FY22-23F net profit by 16%/6% and reduce our DCF derived TP by 18% to RM1.59 (WACC: 7.2%; TG: 2%) partly also to reflect a higher risk-free rate.

1HFY22 results came below expectations, with net profit of RM43.1m making up only 30%/25% of house/street’s FY22 estimates. This was due to: (i) weak ticket sales of RM12.6m/draw vs. our FY22 assumption of RM13.6m/draw; and, (ii) high prize payout rate (EPPR) of 69.7% vs. our FY22 assumption of 68.0%. It declared 2nd interim NDPS of 1.5 sen, (ex-date: 14 Sep; payment date: 30 Sep), totalling 1HFY22 NDPS to 2.5 sen vs. none in 1HFY21.

Ticket sales remained weak. 1HFY22 net profit of RM43.1m jumped 350% from RM9.6m in 1HFY21 as there was a nationwide total lockdown from 1 Jun 2021 with revenue leaping 38% over the period. But, 2QFY22 ticket sales were still weak at RM12.5m/draw which was slightly lower than that of RM12.7m/draw in 1QFY22, at only 71% of pre-COVID level (FY19A: RM17.6m). Besides, EPPR of 69.7% in 1HFY22 was also higher than the theoretical ratio of 67%.

We cut our FY22/FY23 earnings forecasts by 16%/6% on lower assumption for: (i) ticket sales per draw to RM12.7m/RM14.0m from RM13.6m/RM14.9m; and, (ii) EPPR to 69%/67% from 68%/67%. Accordingly, NDPS is also trimmed proportionally based on unchanged 80% payout.

A better FY22 but recovery is still slow. While FY22 is definitely better than past two years which was hit hard by lockdowns, the ticket sales recovery is fairly slow, chalking only 71% of pre-COVID level in 1HFY22. As such, we are now expecting ticket sales to recover to 72%/79% of pre-COVID levels in FY22/FY23 from 77%/85% previously. Having said that, authority enforcement on illegal operator would be the main kicker for ticket sales growth in the future.

A dividend play. MAGNUM’s recovery prospects from the pandemic are weak amidst high inflation that is eating into consumers’ disposable incomes coupled with an aging customer profile specific for the industry. We cut our FY22F and FY23F net profit by 16% and 6%, respectively, and reduce our DCF-derived TP by 18% to RM1.59 (WACC: 7.2%; TG: 2%) from RM1.93 (WACC: 6.4%; TG: 2%) partly to reflect a higher risk-free rate. There is no adjustment to our TP based on ESG of which it is given a 3-star rating as appraised by us. The only saving grace is a decent dividend yield of 4-6%.

Risks to our recommendation:(i) non-renewal of licenses; (ii) unfavourable prize payout ratios; (iii) weak consumer spending amidst high inflation; and (iv) products perceived to be socially undesirable.

Source: Kenanga Research - 19 Aug 2022