• Maintain NEUTRAL and DCF-derived MYR1.08 TP (9% downside). Magnum’s 1Q24 earnings fell short of expectations due to an unfavourable luck factor. We think the current valuation (close to the mean) is fair, and the stock lacks re-rating catalysts for earnings and valuation to reach new highs. Nonetheless, number forecast operators (NFOs) should maintain a high degree of defensiveness due to the relatively inelastic demand from punters, and the decent 5% yield.

• Below expectations. 1Q24 core earnings of MYR23.6m (+11.6% YoY) came in below expectations at 21.2% and 16.3% of our and Street’s full-year estimates. The negative deviation was due to a higher-than-average prize payout ratio during the quarter. A first interim DPS of MYR0.015 (1Q23: MYR0.01) was declared and will go ex on 12 Jun – within expectations.

• Results review. YoY, 1Q24 revenue rose 7% to MYR584.4m, thanks to a higher number of draws (1Q24: 42 vs 1Q23: 41), with sales at 86% of 2019’s level (1Q23: 81%). Despite a higher prize payout (1Q24: 67.6% vs 1Q23: 64.6%), 1Q24 PBT margin expanded marginally by 0.2ppts to 6.1% on lower operating expenses (-39.3% YoY), thanks to the implementation of a more targeted marketing approach. QoQ, 1Q24 sales rose 5%, benefiting from favourable seasonality during the Lunar New Year festive season. However, 1Q24 core net profit dipped 40.9% QoQ to MYR23.6m due to an unfavourable luck factor (prize payout – 1Q24: 67.6%, 1Q23: 61.5%).

• Outlook. Ticket sales for 2Q24F are expected to normalise following 1Q24’s strong sales, which were driven by the Lunar New Year period. Our channel checks indicate that illegal NFOs are capturing significant market share in two northern states, which have been underserved since the closure of legal NFO outlets there. Further re-rating catalysts could come from stricter legislation against illegal NFOs, legalisation of online gaming, and the potential monetisation of Magnum’s stake in U-Mobile.

• Forecast and ratings. Post results, we revised our FY24F earnings down by 5.4% to account for the high 1Q prize payout, but maintained our FY25-26F earnings, as the luck factor/prize payout ratio typically reverts to the mean over time. We maintain our DCF-derived MYR1.08 TP (includes a 10% ESG discount) after rolling over our DCF valuation base year to FY25F. Our TP implies 12x FY25F P/E (close to its mean).

• Key downside risks: Unfavourable luck factor and policies, and softer-than- expected ticket sales. The converse represents upside risks.

Source: RHB Research - 29 May 2024