• NEUTRAL, new DCF-derived MYR1.23 TP from MYR1.27, 3% upside. FY22 results met our and exceeded Street’s expectations. While Magnum’s FY22 estimated prize payout of 65.7% is higher than our 62% forecast, the lower-than-expected expenses helped its bottomline meet our FY22F. Despite results being in line, we trimmed our earnings estimates and TP on the lower number of operating outlets in 1H23, and lingering regulatory risks. Stay NEUTRAL for its slow ticket sales recovery and lack of catalysts.

• Within expectations. FY22 core net profit of MYR103m (4Q22: MYR31m) came within our expectations at 101% of full-year forecasts, and beat consensus’ at 105%. 4Q22 DPS of 1.5 sen also brought FY22 DPS to 5 sen, in line with estimates. FY22 dividend payout ratio stood at 69%, lower than the pre-pandemic 74-99%.

• Results highlights. 4Q22 gaming revenue inched up 6%, as estimated gross sales per draw rose to 12.4 from 12.2 in 3Q22. That said, ticket sales remain at 75-85% of pre-pandemic levels, as the illegal number forecast operators (NFOs) retain their market share gains from the pandemic. Magnum had an estimated prize payout ratio of 64.5% in 4Q22, its eighth quarter deviating from its long-run historical mean of 60%, mainly due to a lower amount of ticket sales to spread the wins.

• First Kedah, next Perlis? 1Q23 will be the first quarter where Kedah’s ban on NFO outlets take effect. We are not privy on Magnum’s plans for its 13 outlets in Kedah (out of the total 485 in Malaysia). However, taking cues from Sports Toto (SPTOTO MK, BUY, TP: MYR1.75), we understand it could take a few months if Magnum were to relocate the outlets to other states. Therefore, we conservatively estimate that Magnum will be operating with 13 less outlets in 1H23. That said, we suspect that its punters (just like those of SPTOTO) are likely visiting Magnum outlets in neighbouring states, which we think could partially cushion sales.

• Forecasts. Despite 4Q22 results being in line with estimates, we trim FY23F earnings by 1.4% after assuming the closure of 13 outlets for 1H23. While our FY23F sales is 6% lower YoY (mainly due to the non-operation of 13 outlets in 1H23, and lower number of special draw days), net profit is forecasted to increase 17%, as we assume the normalisation of prize payout to the long-term mean of c.60%. (FY22: 65.7%).

• New MYR1.23 TP (includes 0% ESG premium/discount). We lowered our DCF TP after lifting WACC to 9.2% from 8.7% on heightened regulatory risks, which we think may linger with concerns of future bans on NFOs in other states. Still NEUTRAL, as the stock lacks catalysts, and its ticket sales recovery remains slow. Magnum trades at 14x FY23F P/E, below its 5-year mean of 19x – a fair discount given its uninspiring prospects and risk of further high-prize payout. The stock yields a decent 4.6%. Key upside risks: Faster-than-expected ticket sales recovery, favourable changes to gaming taxes, and luck factor. The opposite represents downside risks.

Source: RHB Research - 1 Mar 2023