1Q22: Below Expectations, Better Recovery Ahead
Magnum’s 1Q22 results came in below expectations, mainly reflecting the slower-than-expected ticket sales recovery and losses from the investment holdings division.
Nevertheless, we expect Magnum’s ticket sales to recover to 85-90% of pre-pandemic
levels in the coming quarters following the rehiring of migrant workers; valuations will
partially price in the full earnings recovery and prospective yield of about 5.1% in 2022.
Maintain BUY with a lower target price of RM2.38.
RESULTS
• Below expectations. Magnum reported 1Q22 revenue of RM501m (+30.5% yoy, +3.7%
qoq) and core net profit of RM24.2m (+207.9% yoy, -22.4% qoq). 1Q22 net profit accounts
for only 13% and 12% of our and consensus forecasts respectively. Despite a meaningful
recovery in revenue, the lacklustre net profit mainly reflects the higher pre-tax loss recorded
by the investment holdings and others division, resulting in a sharply higher tax rate of 52%
on disallowed interest expenses.
• Better classic 4D games but weaker jackpot sales. We estimate that Magnum’s classic
4D ticket sales per draw improved 15% qoq in 1Q22. For jackpot sales, we estimate sales
per draw to have declined by 10% yoy, and estimate that the more lucrative jackpot games
accounted for about only 22% of total gaming revenue, down 3ppt yoy and 4ppt qoq. This is
attributed to the snowballing of the rival Berjaya Sports Toto’s jackpot price (reaching > RM97m before being struck).
• Prize payout was above the theoretical level, but lower yoy. We estimate 1Q22 prize
payout to be about 69% (theoretically 63-64%), lower than 1Q21’s prize payout of 73%.
• Declared 1 sen DPS. Magnum declared a 1 sen DPS in 1Q22 (1Q21: none), continuing its
quarterly dividend payments for the second time since 4Q21. DPS of 1 sen (0.6% yield)
represents an 86% payout.
STOCK IMPACT
• Defensive nature enticing amid market uncertainty. Magnum offers highly attractive risk-reward dynamics at current share prices, trading at attractive valuations of 10-11x 2023F
PE, which is well below the number forecasting operators (NFO) sector’s three-year mean of
14-15x. Such valuations are particularly appealing for Magnum given its asset-light business
model and doles out most of the domestic cash flows as dividends.
• Lush prospective yield appeals amid market uncertainty. Magnum offers sustainable
prospective yields of 4.3-5.1% from 2022 onwards and close to 7.5% in 2023, backed by
earnings resilience and a stable payout ratio of 80-90%. This should satisfy investors’
hunger for sustainable high-yield plays in a low interest rate environment and volatile capital
market.
• Emerging from pandemic-related restrictions. Magnum, which is still trading close to
pandemic lows, remains as an ideal defensive haven amid a risk-off market, given its low
beta, steady cashflow streams and lush dividend yields. While current ticket sales and
revenue have recovered to only 80-85% of pre-pandemic levels, we expect the recent
weeks’ removals of MySejahtera scanning and capacity restrictions coupled with the nation’s
rehiring of migrant workers, to further revitalise Magnum’s earnings recovery to >90% of prepandemic levels by as early as 2Q22. This will allow Magnum to restore its attractive
annualised dividend yields of >6% from 2H22 onwards
• Monetisation of stake in U-Mobile remains a key catalyst, but timeline remains
unknown. A key catalyst for Magnum would be the monetisation of its 6.3% stake in UMobile. According to earlier media reports, U-Mobile could be seeking an IPO to raise
US$500m. The successful monetisation of its 6.3% stake in U-Mobile (book value of
RM270m, or 7% of its market cap) could fetch RM400m, representing 14% of its market cap.
Note that U-Mobile has turned EBITDA positive and has 10% market share of the country’s
mobile subscriptions.
EARNINGS REVISION/RISK
• We cut our 2022 net profit forecast by 13% as we incorporate the higher pre-tax loss
recorded by the investment holdings and others division, as well as higher tax on disallowed
interest expenses. 2022’s effective tax rate is now estimated to be 36% before falling to prepandemic levels of 30-31%.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower DCF target price of RM2.38, which implies 15x 2023F PE after
incorporating U-mobile’s option value of 19 sen/share. Magnum is also appealing for its
resilient prospective yield of about 5.1% in 2022.