Magnum Target Price at RM3.24

Magnum’s 3Q boosted by lower effective tax rate

Magnum Bhd
(Nov 15, RM3.24)
Maintain neutral at RM2.34 with a target price of RM3.24: Stripping out the losses from its discontinued operations arising from its demerger, Magnum’s core earnings for for the first nine months ended September of 2013 financial year (9MFY13) increased by 7.7% year-on-year (y-o-y) to RM265.6 million. This was above expectation, accounting for 86.6% of our and 78.6% if consensus full-year estimates.

The main variance between the group’s reported 9M profit and our earnings estimates was due to a lower than expected effective tax rate of 17.4% compared with our estimate of 25%.

In fact, the group’s 9M profit before tax (PBT) of RM321.4m came largely within our expectation, meeting 78.8% of our full-year PBT target for FY13.

We understand the lower effective tax rate was mainly due to the availability of tax credit to set off against tax expenses.

Although the group’s gaming revenue for the first nine months declined by 4.2% y-o-y, attributable to one less draw, weaker economic environment and low 4D Jackpot 1 prize pool, its profit before tax (PBT) increased by 4.8% to RM326 million mainly due to a lower prize payout ratio.

Our estimates show the group’s prize payout ratio for the first nine months was 62.5%, which was lower than 65% recorded in 9MFY12 and within the theoretical rate of 63%.

Nonetheless, we observe that the operational environment remains challenging for its gaming operations, where gaming revenue per outlet per draw in 9MFY13 eased by about 3.6% y-o-y. This reflects the ongoing competition within the numbers forecast operator (NFO) industry.

Its investment holding and other divisions recorded a reduced loss before tax of RM5.6 million for 9MFY13, compared with the loss before tax of RM15.8 million registered in the corresponding period last year, mainly supported by lower finance cost as borrowings were pared down.

The group declared a third interim dividend per share (DPS) of five sen, bringing its nine-month dividend declared to 13.8 sen, representing a payout ratio of 91.4%

We raise our earnings per share and DPS forecasts for FY13 by 9.5% to 23.4 sen and 18.7 sen, respectively, mainly to adjust for a lower a effective tax rate of 17.5% compared with our previous estimates of 25%.

We are keeping our earnings estimates for FY14 onwards, pending review post a company visit.

We maintain our “neutral” recommendation with an unchanged target price of RM3.24 based on our dividend discount model. We will review our recommendation and target price for the group after a company visit.

For now, we believe that: (i) the potential US tapering of quantitative easing, which does not favour yield seeking investment; and (ii) uncertainties with regards to the implementation of the goods and services tax on numbers forecast operators, could cap the upside of its share price. — Alliance IB Research, Nov 15