Magnum’s  9M14  core  profit  of  MYR196.0m  (-24.6%  YoY)  fell  short  of expectations due to  a  higher-than-expected prize payout ratio in  3Q14. Maintain  NEUTRAL  with  our  TP  reduced  to  MYR3.06  from  MYR3.22(5.2%  upside),  as  we  cut  our  FY14-16  EPS  by  7.1-14.3%.  Management declared a third interim DPS of 5.0 sen.  YTD DPS stands at a hefty 15.0 sen, translating into a payout ratio of over 108.7%.

Results review.  9M14 revenue dipped  4.0% YoY  to MYR2.16bn due  to a slightly  lower number of draws at  132  (vs 133  draws  in 9M13), while ticket  sales  also  weakened  due  to  a  lower  average  jackpot  size  of MYR7.9m  (vs  MYR10.2m  in  9M13).  EBITDA  shed  8.4%  YoY  to MYR322.1m,  weighed  by  a  marginal  uptick  in  its  overall  prize  payout ratio  to  an  estimated  67.0%  (from  65.5%).  All  in,  core  earnings  of MYR196.0m  (-24.6%  YoY)  fell  short  of  both  consensus  and  our expectations at  62.4% and  64.1% of the respective full-year estimates, dragged down by  weaker-than-expected showing in 3Q14. We attribute this to  the  higher-than-expected prize payout ratio booked in during  the quarter  at  an  estimated  68.4%,  up  by  some  70bps  QoQ  and  350bps 
YoY. 

Generous dividend payout. Management declared its third interim DPS of 5.0 sen. Its YTD DPS of 15.0 sen translates into a payout ratio of over 108.7%, which is in line with management’s commitment to a minimum 80% level. We forecast  for  Magnum’s dividend yield to come in at  6.4-6.6% annually for FY15-16, pegging a payout ratio of 90%.

Forecasts and risks.  We slash our FY14  EPS by 14.3% after  lowering our  prize  payout  ratio  due  to  unfavourable  luck  factor  YTD.  On  top  of that, we trim our FY15-16 EPS by 7.1-8.2% to take into account potential earnings erosion from  the  implementation of  the goods and services tax (GST) come  Apr 2015. Key risks include potential slower ticket sales as consumers tighten their belts amidst rising inflationary pressure  as well as continued rampant competition from illegal operators. 

Maintain NEUTRAL.  All in, we reiterate our  NEUTRAL stance, with our SOP-based  TP  lowered  to  MYR3.06  (from  MYR3.22)  following  our earnings revision. Although Magnum’s earnings prospects are unlikely to be exciting going forward, we expect its share price to be supported by its decent dividend yield of over 6% p.a.

Source: RHB