• Keep NEUTRAL, new DCF-derived MYR1.14 TP from MYR 1.19, 4%upside. The service tax hike in Budget 2024 was an unexpected setbackfor the gaming industry. We cut our forecasts accordingly to reflect theincreased overall tax burden. We think Magnum’s ticket sales and dividendrecovery have been priced in, and it lacks re-rating catalysts to bring itsearnings and valuation to new highs. That said, its c.7% dividend yield couldoffer a cushion against downside risks. This report marks the transfer ofcoverage to Tai Yu Jie.

• Service tax hike. In Budget 2024, Prime Minister Dato’ Seri Anwar Ibrahimannounced that the Government will raise the service tax rate by 2ppts,from 6% to 8%. Given gaming services fall under the taxable category ofthe Service Tax Act of 2018, this adjustment essentially represents anadditional tax burden for the NFOs. However, the quantum is 1-2% of grosssales as the net payable service tax is net of gaming tax, pool betting dutyand payout. Note that the NFOs have been absorbing these taxes since theimplementation of the Goods and Services Tax (GST) in 2015 and also theservice tax continues to apply to the gaming industry following the wideningof scope and re-implementation of Sales & Service Tax (SST) in 2018.

• Earnings impact. We understand that reducing the prize payout may notbe an ideal strategy nor raising ticket prices as these could potentially leadto decreased sales and a loss of market share to illegal NFOs. Afterfactoring in the increased tax rate, we trim our FY24F-25F earnings by 4-5%, assuming that the company absorbs all the incremental cost withoutincreasing the ticket price or lowering the prize payout.

• Lacking new positive catalysts. Although ticket sales are graduallyimproving and inching closer to pre-pandemic levels, we believe the currentvaluation – close to its mean – is fair and that the market has already pricedin the recovery in ticket sales. While the NFOs are eagerly awaiting stricterlegislation against illegal NFOs and the legalisation of online gaming, webelieve such policies are not on the top of the Government’s list for now.Despite the challenges, we note that the recent state elections haveimproved the dividend outlook for the NFOs, given the diminisheduncertainty may reduce the NFOs’ need to retain cash.

• Still NEUTRAL. Post earnings cut, our TP drops to MYR1.14, which implies13.7x FY24F P/E – close to its mean – and includes a 0% ESGpremium/discount. Our valuation is at a slight premium over its closest peerSports Toto (SPTOTO MK, NEUTRAL, TP: MYR1.55), as it is not exposedto the challenging operating environment in the UK, unlike SPTOTO(through HR Owen). Still, we caution that if Magnum maintains its aboveaverage prize payout ratio, it could pose downside risks to future earningsand dividends. Downside risks: Unfavourable luck factor and policies, andsofter-than-expected ticket sales. The converse represents upside risks.

Source: RHB Securities Research - 18 Oct 2023