• Downgrade to NEUTRAL from Buy, new DCF-based MYR1.55 TP from MYR2.01, 7% downside, 3.6% FY22 yield. 2Q22 core earnings missed our and Street’s estimates. Dividends also fell short of forecasts. Ticket sales remained soft during the quarter despite the resumption of economic activities. We believe the catalysts that could propel ticket sales to pre- pandemic levels will likely not materialise in the near future. Hence, we believe Magnum’s near-term prospects remain challenging.

• Below expectations. 2Q22 core profit of MYR27m fell short of our and Street’s expectations, with 1H22 making up 33% and 30% of full-year estimates. Revenue fell short at 41% of our full-year forecast due to softer- than-expected ticket sales. 2Q22 DPS of 1.5 sen brought 1H22 DPS to 2.5 sen, falling short of our FY22 estimate of 9 sen.

• Soft ticket sales. Gross ticket sales of MYR531m were still at 70-80% of pre-pandemic levels, similar to where it stood over the last two quarters. This suggests the resumption of economic activity and reopening of borders in 2Q22 had little impact on ticket sales recovery. QoQ, revenue fell 4% on the usual seasonality factor. YoY, revenue jumped 48% against a 2Q21 that saw various lockdowns. We suspect various factors might have weighed on the latest ticket sales: i) Illegal number forecast operators (NFOs) could be gaining more market share, ii) punters may have remained financially worse off and may be adversely impacted by high inflation, and iii) the lack of foreign labour punters.

• Some glimmer of hope? But likely a dragged-out recovery. In the near term, the likely factors that could propel ticket sales to pre-pandemic levels are: i) Stricter enforcement against illegal NFOs, ii) the return of foreign workers, and iii) a higher number of special draws in 2H22. However, we note that each of the aforesaid catalysts have caveats: i) Stricter enforcement will only happen after the next general election, ii) there is no concrete data on foreign workers’ ticket sales contributions (and they are unlikely to return en masse), and iii) a higher number of special draws may reduce the sales per draw. With a dim economic outlook and continuous inflationary pressures – which could exacerbate punters’ already-dire financial situations – we think ticket sales recovery will be slow.

• Forecasts. We trim FY22F-24F earnings by 25-27% – as we foresee a much slower-than-expected recovery – and as we err on the side of caution. We trim DPS to 6-7 sen from 9-13 sen, implying 3.6-4.2% yields. As we lower our earnings estimates, we also trim our TP (DCF) to MYR1.55 – this includes a 0% ESG premium/discount. We downgrade Magnum to NEUTRAL, as we foresee a lack of near-term re-rating catalysts. We also think its recovery prospects (or lack thereof) are already priced in.

• Key upside risks include a faster-than-expected recovery in ticket sales, favourable changes to gaming taxes, and luck factor. The opposite represents the downside risks.

Source: RHB Research - 19 Aug 2022