We expect minimal earnings impact on MAGNUM due to the reduced special draws from 2023 and the closure of outlets in Kedah. This is because profits from special draws are inherently low (due to an extra 10% tax) while historically ticket sales in Kedah were also below that of the group’s average (given the low non-Muslim population). We maintain our FY22F earnings but cut our FY23F earmings by 5% and reduce our TP by 9% to RM1.39 (from RM1.52). Maintain MARKET PERFORM.

Ticket sales to be hit by special draws cut and outlet closure. Starting Jan 2023, NFO ticket sales are expected to be affected by: (i) the cut in special draws to eight times per year from 20-22 times previously, and (ii) the non-renewal of premise licenses for NFO outlets in the state of Kedah.

Earnings impact is less significant. Nonetheless, we expect earnings impact to be insignificant given that: (i) the special draws come with an additional tax collection of 10% which reduce NFO’s profitability significantly as opposed to the usual regular draws while (ii) MAGNUM has only 13 outlets in Kedah which makes up less than three percent of the group’s total outlets of 485. In addition, historically, ticket sales in Kedah were less than the group’s average given the low non-Muslim population. As a result, the actual impact quantum would be less than the >3% outlets closure.

Cut FY23 earnings estimate by 5%. We lowered our FY23 total draw day assumption to 164 from 176 previously as special draws are cut to eight time from the previous assumption of 20 draws while ticket sales are cut by 2% to account for the said outlets closure in Kedah. As such, we cut FY23 earnings forecasts by 5% while NDPS is also cut proportionally based on unchanged earnings payout assumption of 80%. Post earnings revision and updating latest beta from Bloomberg, our DCF-derived valuation is reduced to RM1.39 from RM1.52 as WACC is adjusted to 7.9% from 7.2% previously.

Improved economic conditions should help to spur ticket sales. While we are mildly negative pertaining to the special draw cut and outlet closure in Kedah as the net impact could be insignificant as mentioned above, we believe that as economic growth improves (to help consumers’ spending power) and enforcement crackdown on illegal operators should hasten recovery. We have forecast ticket sales recovering to 72%/78% of pre-pandemic levels in FY22/FY23 which is slower than that of >80% for rival SPTOTO.

While MAGNUM’s recovery prospects from the pandemic is slower than SPTOTO given its relatively ageing customer profile, the stock still offers attractive dividend yields of >7% which supported our MARKET PERFORM recommendation albeit with a lower target price of RM1.39. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our recommendation include: (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 - 12 Jan 2023