MPHB bets on gaming with Magnum buy

Gaming sector
Maintain overweight: Multi-Purpose Holdings Bhd (MPHB) has proposed to buy the remaining 49% stake it does not own in Magnum from CVC Asia Pacific Ltd for RM1.64 billion. The purchase consideration will be settled by 360.5 millionnew shares in MPHB at RM2.30 per share plus RM809.2 million cash. Besides the ordinary shares, the purchase also includes RM674.65 million of nominal value redeemable convertible loan stock class C of Magnum (RCULS-C).

The proposed purchase consideration was arrived at after taking into account, among others, the audited net assets of the Magnum group of companies of about RM1.07 billion as at Dec 31, 2009; the nominal value of and the outstanding interest accrued on the RCULS-C and the future earnings potential of Magnum.

MPHB’s stated rationale for the acquisition was to enable gaming to become a core business for the group, to strengthen its future profitability and cash flow position and widen its investor base appeal. No mention was made of any intention to relist Magnum subsequently, although we believe this is the final strategy for the group, based on previous comments made by management to media and analysts.

This deal essentially values Magnum at RM3.34 billion, or RM3.34 per share, 3.2% lower than the RM3.45 apiece Magnum was privatised at back in 2008. The RM3.34 billion price implies a valuation of just 8.8 times PER, based on annalised 9-month operating profit of MPHB’s gaming operations, a far cry from the FY08 PER of 18.3 times and 17.2 times FY09 that Magnum was privatised for,and from BToto’s current FY04/10 PER of 18.4 times and FY04/11 PER of 14.5 times. The acquisition is priced at 3.1 times P/NTA, similar to the P/NTA it was trading at at the time of the previous privatisation.

Risks include:
(i) regulatory changes to gaming policies in the country;
(ii) increase in illegal gambling activities;
(iii) luck factor risks; and
(iv) potential hike in gaming taxes.

We make no change to our “overweight” call on the sector. Although we do not cover MPHB, we believe this could present a trading opportunity for MPHB, given the relatively inexpensive valuations for the acquisition and the potential for higher valuations should Magnum be relisted at a later stage. — RHB Research, Feb 10