• Upgrade to BUY from Neutral, new MYR2.01 TP from MYR1.95, 15% upside. On 30 May, ChinaPress reported that the number of special draw days allowed in 2022 has been increased to 22 days from 11 days. We are positive on this development, as it is earnings accretive. We see value emerging after the recent share price correction, as the stock now offers a decent 15% upside, with a boost from the increase in special draw days, and supported by a 5-6% yield.

• Increase in special draws. On Monday, ChinaPress reported that the number of special draw days allowed in 2022 has been increased to 22 days from 11 days. The news article quoted sources from the number forecast operator (NFO) industry. To recap, when the Pakatan Harapan administration took office in 2019, it reduced the number of special draw days to 11 from 22, and further slashed it to eight days in 2020. Based on the news report, there will be a resumption to 22 special draw days per year. As there have only been five special draws YTD, this suggests that there will be 17 more in the remaining months of 2022. Figure 1 is a snapshot of the news article that illustrates the remaining special draws for the year.

• Recap of 1Q22 results. 1Q22 core net profit fell short of our and Street's expectations, making up only 11% and 12% of full-year estimates. We suspect that the disappointing ticket sales were likely due to: i) Punters turning to Sports Toto (SPTOTO MK, BUY, TP: MYR2.23) during its historic Supreme 6/58 jackpot run, ii) the high number of COVID-19 Omicron cases in 1Q22, and iii) punters being financially worse off and/or having turned to illegal NFOs.

• Forecast. After raising the number of special draw days to 22 in 2022 and for all future years, we increased Magnum's FY22-24F earnings by 2-3%. Note that special draws tend to be of lower margin vs normal draws, as the NFOs need to pay an additional 10% tax as a special contribution to the Government on all special draw gross ticket sales (after deducting the 8% gaming tax).

• Upgrade to BUY. The higher earnings raised our DCF TP to MYR2.01 from MYR1.95. Our TP includes a 0% ESG premium/discount, based on its ESG score of 3.0, which is at the country median. We upgrade our rating, as: i) The stock price has slid 3% since the rating downgrade in our last report, now offering a decent capital upside of 15%, ii) the higher number of special draw days has yet to be priced in, in our view, and iii) the stock offers an FY23F yield of 6%.

• Key risks include the reduction in the number of special draw days, another COVID-19 wave leading to outlet closures, changes in gaming taxes, and the luck factor.

Source: RHB Research - 1 Jun 2022