Magnum’s 2QFY13 within expectations

Magnum Bhd
(Aug 23, RM3.32)
Maintain neutral at RM3.33 with a revised target price of RM3.24 (from RM3.12): Stripping out earnings contributions from its discontinued operations arising from its demerger exercise, Magnum’s core earnings for the first half of the 2013 financial year (1HFY13) increased by 4.2% year-on-year (y-o-y) to RM195.3 million. This accounted for 66.1% and 54.1% of our and consensus’ full-year estimates.

Nonetheless, we deem the earnings to be within our expectations given that the group’s 1H earnings were mainly boosted by first-quarter (1Q) contributions from its gaming operations, benefitting from seasonally high Chinese New Year factor and lower-than-expected prize payout ratio.

In fact, even though 2QFY13 profit before tax (PBT) contribution from its gaming business increased by 7.5% y-o-y to RM73.7 million driven by lower prize payout ratio, lower operating expenses and finance cost, it has contracted by 50.3% compared with PBT of RM148.4 million reported for 1QFY13.

Our estimates show that the group’s prize payout ratio for 1H was 61.5%, which was higher than 59% recorded in 1Q. As such, we do not see the need to revise our earnings significantly, since we expect Magnum’s prize payout ratio to normalise further towards the theoretical prize payout ratio of 63%.

On the other hand, we observe that operational environment remains challenging for its gaming operations, where gaming revenue per outlet per draw in 1HFY13 eased by about 5.7% y-o-y. This reflects the on-going competition within the number forecast operators industry. 

PBT from its corporate and other divisions for 1HFY13 was lower by 57.9% y-o-y to RM22.2 million, in the absence of sale of shares in an associated company and gains from fair value adjustments in quoted investments recognised in 1HFY12.

The group declared a single-tier interim dividend per share of 5 sen.

With the recent completion of the demerger exercise, our earnings forecasts for Magnum from FY13 onwards only consists mainly of income from its gaming and corporate operations.

We adjust our FY13 and FY14 EPS by 3.4% to 2.0% mainly for bookkeeping purpose. We also revise our FY13 and FY14 dividend per share estimates accordingly, taking into account an 80% payout assumption.

We also introduce our FY15 earnings forecast for the group.

We are maintaining our neutral recommendation but raise our target price to RM3.24 (from RM3.12) based on our dividend discount model, upon revising our dividend assumptions.

Although we acknowledge that Magnum offers a relatively high FY13 dividend yield of 5.1%, we believe that the current rising yield environment may deter investors from investing into the group.

Furthermore, uncertainties of whether the government will raise gaming tax in the coming budget may continue to be a drag on its share price performance. — Alliance Research, Aug 23

This article first appeared in The Edge Financial Daily, on August 26, 2013.