Now that Magnum has become a pure gaming play, we revamp our earnings model to determine the profit outlook of its NFO operation. In the recent run-up after the shares went ex on 27 May upon the listing of MPHB Capital, the stock has gained 11.2%. We take the opportunity to downgrade our call to NEUTRAL, with our FV unchanged at MYR3.89.

- 2QFY13 gaming earnings to total MYR60m-MYR70m.  We  expect Magnum’s 2QFY13 revenue from  its number forecasts operator (NFO) segment to hover around MYR670m-MYR720m. Assuming a normalised prize payout ratio of 68%, we expect core earnings in  the MYR60m-MYR70m range. This would translate into a 40%-50% q-o-q drop in earnings owing to a higher number of draws and lower-than-average prize payout ratio in the preceding 1QFY13. On a y-o-y basis, however, we expect to see some improvements owing to the  above-average prize payout ratio in 2QFY12.

- Potential listing of U-Mobile?  Media rports have speculated that U-Mobile (in which Magnum has a 6.3% stake), is planning an IPO by end-2013 with an indicative market cap of MYR4bn-MYR5bn.  We believe Magnum will likely cash out its investment that could give rise to a one-off gain on disposal of MYR29.8m-MYR93.1m.

- Earnings revision.  As  the group’s  insurance and property arms have been spun off under MPHB Capital (NR), we revamp  our earnings model to solely capture its gaming business. Our net profit  forecasts now stand at MYR258.6m-MYR281.7m for FY13-FY15  respectively, with DPS of 14.4 sen-15.7 sen, and a dividend payout ratio of 80%.

- Downgrade to NEUTRAL.  Following the recent run-up in its  share price, Magnum now trades at 21.0x FY14 P/E  on par with other NFO operators in the country. The implied yield of 3.8% p.a. Accordingly, we downgrade our call to NEUTRAL. No changes to our SOP-based FV of MYR3.89 (or MYR3.40 ex-capital repayment of MYR0.49 per share on 2 Aug) as we had previously excluded the group’s insurance and property arms from our valuation.

Source: RHB