• Maintain NEUTRAL, TP drops to MYR1.27 from MYR1.31, 1% downside with c.4% FY22F yield. Yesterday, Prime Minister Datuk Seri Anwar Ibrahim reduced the number of special draw days for 2023 to eight, from 22. As the special draws tend to have lower margins, the reduced number of special draw days negatively impacts earnings. We trim FY23-24F earnings by 3% pa, and maintain our NEUTRAL call due to Magnum’s slower-than-peers ticket sales recovery.

• Decrease in special draws. Yesterday, the prime minister announced that the number of special draw days allowed for 2023 will drop to eight, from 22. Earlier this year (end-May), the Government had increased the number of special draw days to 22, from 11. We have adjusted our assumption to impute eight special draw days a year, into perpetuity.

• Less special draw days = reducing a government revenue source. Special draws tend to be of lower margins vs normal draws, as the number forecast operators (NFOs) need to pay an additional 10% as a special contribution to the Government on all special draw gross ticket sales (after deducting the 8% gaming tax). Historically, the Government has turned to special draws to shore up its coffers.

• Forecasts. After reducing the number of special draw days from 2023 onwards into all future years, we also decrease our earnings estimates for FY23-24 by 3% pa.

• Mild impact; investors can continue to accumulate. The earnings reduction only reduced our DCF-based TP to MYR1.27 from MYR1.31. Our TP includes a 0% ESG premium/discount, based on our proprietary methodology. We think yesterday's share price decline reflects the anticipation of reduced earnings for this company. Note that, despite the increase in number of special draw days in end-May, there was no significant improvement in Magnum’s 3QFY22 earnings. Maintain NEUTRAL, as the stock lacks near-term re-rating catalysts, and as the market has priced in its near-term recovery and prospects. While we recognise that there are continued regulatory uncertainties and risks, we do not rule out the possibility of favourable policies in the future, namely the potentially stronger enforcement against illegal NFOs.

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

Source: RHB Research - 6 Dec 2022