• Keep NEUTRAL, new MYR1.08 TP from MYR1.13, 6% downside and 5% yield. We met with management recently to discuss the latest outlook for the number forecast operator (NFO) sector. We reiterate our call, premised on a lack of catalysts despite the stock offering an element of defensiveness. This is on Magnum’s yields and relatively inelastic demand from punters – on top of the potential monetisation of its U Mobile stake, which may provide an additional 12% upside to our TP if a MYR10bn valuation can be realised.

• Digitalisation efforts to attract younger punters. Amid government restrictions on online gaming, Magnum has intensified its digitalisation efforts to appeal to a younger demographic of punters. These include the introduction of digital payment alternatives, digitisation of the claims process, and revamping of the Magnum app for enhanced information dissemination and marketing. It is interesting to observe higher average ticket sales/customer vis-à-vis punters using cash – this yields some early optimism for such initiatives. However, we remain cognisant that these efforts may not be sufficient in attracting the younger generation, given the availability of alternative options – eg illegal online gaming – and increasing popularity of mobile gaming and alternate investments.

• Driving operational efficiency. Management attributed the 20% YoY reduction in operating costs in FY23 to a more targeted marketing approach and high base effect from FY22’s elevated expenses due to consultancy fees for strategy development. That said, Magnum does not anticipate further substantial savings in operating expenses moving forward. Management also highlighted that the recent high prize payout was due to an unfavourable sales mix and luck factor.

• Increasing threat of illegal NFOs. Magnum recognises the ongoing threat posed by illegal NFOs and believe the latter have gained market share, especially in two northern states where the state governments there do not allow NFO outlets to operate. This not only hampers sales recovery – with ticket sales/draw hovering at c.MYR14m as of FY23 (80% of pre-pandemic levels) – but also results in significant tax revenue losses for the Government. While the NFOs are eagerly awaiting stricter legislation against illegal NFOs and legalisation of online gaming, there are currently no imminent signs that such policies will be implemented in the near future.

• We make no changes to our earnings forecasts, but take the opportunity to revise our ESG score to 2.5 from 3.0, given the lack of disclosure on emissions. We also refresh our risk premium assumptions. Consequently, our DCF- derived TP drops to MYR1.08, implying 12.4x FY24F P/E (close to its mean) and a 10% ESG discount. We highlight the potential upside to our TP on Magnum’s 6% U Mobile stake at BV, implying MYR6.4bn valuation upon monetisation. Key upside/downside risks: Favourable/unfavourable luck factors and policies, and higher-/lower-than-expected ticket sales.

Source: RHB Research - 15 Mar 2024