• Maintain NEUTRAL and DCF-derived MYR1.24 TP (2% upside), c.6% yield. Magnum’s 9M24 results met our expectations but underperformed Streets’. Despite challenges from competition against illegal number forecast operators (NFOs), and the structural decline in ticket purchases among younger consumers, the stock offers generous dividend payouts. With the current valuation close to the mean, further re-rating catalysts would be favourable policies or the monetisation of Magnum’s stake in U-Mobile.

• 9M24 results within our expectations but below consensus’. Core earnings of MYR104.2m (+22.1% YoY) accounted for 77% of our forecasts and 65% of Streets’. A third interim DPS of 1.5 sen (3Q23: 1 sen) was declared and will go ex on 18 Dec, bringing YTD DPS to 5 sen (9M23: 4 sen), within our estimates.

• Results review. YoY, 9M24 sales rose 6.2% to MYR1.7bn, driven by higher 4D Classic and 4D Jackpot sales despite the same number of draws. 9M24 PBT margin expanded by 0.9ppts to 9%, supported by stronger sales and savings in interest expenses from a lower amount of medium-term notes outstanding. QoQ, 3Q24 revenue fell 14.3% to MYR516m, reflecting a normalisation from the high base of strong sales driven by a long jackpot run in 2Q24. Coupled with higher prize payouts QoQ (3Q: 64.7% vs 2Q: 61.7%), 3Q24 core earnings dipped 21% QoQ to MYR35.6m.

• Outlook. Based on our channel checks, the sector has been impacted by competition from illegal NFOs, while also facing a structural decline due to reduced interest in ticket purchases among the younger generation, hindering sales from reaching new heights. Licensed NFOs are awaiting the decision on an appeal to resume operations in Kedah, with a favourable outcome potentially allowing them to reclaim market share from illegal players, and discouraging other states from arbitrarily shutting licensed outlets. Although stricter enforcement against illegal NFOs and the legalisation of online gaming remain potential catalysts, there are no immediate signs of these policies being implemented.

• Monetisation of U Mobile. Magnum’s 6.3% stake in U Mobile currently has a book value of MYR385.4m. U Mobile is aiming for an IPO valuation of MYR10bn, which, if realised, will increase the value of Magnum’s stake to MYR633m, potentially adding an additional 12% upside to our TP.

• Forecasts and ratings. Post results, we make no changes to our earnings forecasts and DCF-derived MYR1.24 TP (inclusive of a 10% ESG discount). Our TP implies 12.2x FY25F P/E (close to its 5-year mean).

• Key downside risks: Unfavourable luck factor and policies, and softer-thanexpected ticket sales. The opposite of this would represent upside risks. 

Source: RHB Securities Research - 22 Nov 2024