1Q22 missed; impending earnings recovery
? 1Q22 results missed on slightly weak NFO sales, investment loss and taxes.
? We now expect NFO sales to sequentially recover in 2Q-3Q22F, with a full
recovery to pre-Covid-19 levels in 4Q22F (vs. 3Q22F previously).
? Reiterate Add on Magnum (top NFO pick), with an 11% lower TP of RM2.10.
1Q22 results a miss on weak NFO sales, investment loss and taxes
Magnum’s 1Q22 core net profit surged 1.2x yoy to RM17m due to a rebound in number
forecast operations (NFO) revenue and lower prize payout ratio, which more than offset
the higher fair value loss on investments. Qoq, core net profit fell 18.8% due to higher
effective tax rate, despite improved NFO earnings. 1Q22 core EPS was a miss, at 7%/8%
of our/Bloomberg consensus FY22F forecasts, owing to slightly weak NFO sales, plus
high investment loss and effective tax rate (though the latter two may normalise for the
full year). Hence, 1Q22 DPS of 1 sen tracked below our FY22F estimate of 12.5 sen.
NFO sales recovered yoy but was slightly weaker than expected
1Q22 net NFO revenue recovered by 30.5% yoy, as 1Q21 was hit by the closure of 90%
of its outlets during the movement control order (from mid-Jan to mid-Feb 21), which
affected 18 draws. Nonetheless, the rebound was slightly softer than expected, as NFO
sales/draws slid 12.4% yoy (or at c.78% of pre-Covid-19 levels, vs. our projected 85%).
1Q22 NFO sales grew 3.7% qoq, as seasonally stronger Chinese New Year sales drove
an 8.6% accretion in sales/draws. Accordingly, 1Q22 NFO PBT tripled yoy to RM41m
(+17.4% qoq), further boosted by an estimated 2-4%-pt yoy drop in the prize payout ratio.
Lifting of Covid-19 SOPs to spur further sales recovery in 2Q22F
We gather that NFOs’ sales rose to slightly above 85% of pre-pandemic levels as of
early-May. We now expect a sequential recovery in NFO sales in 2Q-3Q22F, with a full
recovery to pre-Covid-19 levels in 4Q22F (vs. 3Q22F previously), as most Covid-19
SOPs (e.g. mask-donning outdoors and social distancing) have been lifted since 1 May.
Earnings revisions and outlook
We cut FY22F core EPS by 9.9% to factor in a more gradual NFO sales recovery, while
FY23-24F’s are tweaked slightly for housekeeping. We now see FY22F core net profit
rebounding yoy to RM207m (FY21: nil), before rising a further 21.2%/stabilising yoy in
FY23F/24F, barring any Covid-19 shocks. DPS is expected to fall to 11.3 sen in FY22F
(previous: 12.5 sen, 80% payout), before it is restored to pre-pandemic levels of
16.3/16.2 sen in FY23F/24F (minor changes), still based on a 95% payout.
Reiterate Add; DCF-based TP cut 11% to RM2.10 (WACC: 7.6%)
We cut Magnum’s TP after raising the risk-free rate to 4.5% (previous: 3.5%, amid recent
rise in government bond yields); the earnings cut is confined to only FY22F. Its FY22-24F
yields remain attractive at 6.3-9.0% p.a. Re-rating catalysts: full NFO sales recovery and
potential monetisation of its stake in U Mobile. Downside risk: further Covid-19 waves.