• Still NEUTRAL, with new DCF-derived MYR1.04 TP from MYR1.06, 3% upside. Magnum’s 1Q23 results came below our expectations, mainly due to higher-than-expected prize payout ratio. This is the ninth consecutive quarter where the prize payout ratio continued to deviate from its long-term mean of 60%, mainly due to the lack of ticket sales to spread the wins. We have adjusted our earnings estimates accordingly. Despite the lack of catalyst in the near term, we remain NEUTRAL on the stock as it still yields a decent 5.9%, with its current valuation largely reflecting its slow recovery.

• Below expectations. 1Q23 core net profit of MYR21m is below our expectations, making up only 17% of our full year estimate. Its 1 sen DPS is within our expectations, with 1Q23 DPS implying a 91% dividend payout ratio, comparable with pre-pandemic’s 74-99%.

• Results highlights. 1Q23 gaming revenue inched up 1% as estimated gross sales per draw rose to 14.6 from 12.4 in 4Q22. Its ticket sales still remain at 81% of pre-pandemic levels as we suspect that the illegal number forecast operators (NFOs) continued to retain their market share gains from the pandemic. Magnum had an estimated prize payout ratio of 66% in 1Q23, its ninth quarter deviating from its long-run historical mean of 60%, mainly due to a lower amount of ticket sales to spread the wins.

• Upcoming state elections could keep investors sidelined. With Selangor, Penang and Negeri Sembilan (which house a total of 33% of Magnum’s total current outlets) slated to have state elections in 3Q23, investors may remain worried about an outcome similar to that of Kedah, where the unfavourable political landscape led to the closure of outlets.

• Trimming estimates. We lower our FY23F-25F by 14-6% as we increase the prize payout ratio to account for the continued trend of a high prize payout ratio. This is to account for the possibility of a higher prize payout ratio in the near term.

• Still NEUTRAL, with a lower MYR1.04 TP (0% ESG premium/discount). We cut our TP due to lower earnings estimates. Our current DCF assumptions have already baked in the heightened regulatory risks, which we think may linger with concerns of future bans on NFOs in other states. Although the stock lacks catalyst, we remain NEUTRAL, as it still yields a decent 5.9% and it is trading at a 14x FY23F, already at a steep discount to its 5-year mean of 19x. We think that this steep discount has largely reflected its slow earnings recovery and heightened regulatory risks.

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

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 19 May 2023