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Monday, May 22, 2017

CIMB Research downgrades Magnum to reduce

Monday, 22 May 2017 | MYT 8:36 AM

KUALA LUMPUR: CIMB Equities Research has downgraded Magnum Bhd from Hold to Reduce with a lower dividend discount model based target price of RM1.85.

It said on Monday the reduction followed its cut in its earnings per share and dividend per share for Magnum, which is involved numbers forecast operations, as the near-term downside risks outweigh its dividend yield appeal.

“We see weak consumer sentiment and increasing incidences of punters shifting to illegal operators as de-rating catalysts and downside risks to dividend payout. An upside risk to our call is stronger-than-expected government clampdown on illegal betting,” it said.

CIMB Research said Magnum’s 1Q17 revenue contracted 7.4% on-year to RM697.1mil, while core net profit fell by a larger 54.9% on-year to RM31.4mil.

The lower revenue in 1Q17 was mainly due to softer consumer spending, intensified competition from illegal operators, as well as the lower number of draws during the quarter.

“We attribute the group’s 1Q17 earnings decline to the above factors, coupled with the higher prize payout ratio of 74.6% in 1Q17, based on our estimates (vs. 1Q16: 68.7%).

“Although Magnum’s sales in 1Q17 were higher on-quarter (+9.9% on-quarter) due to strong Chinese New Year demand, the group’s pretax profit fell 39.4% on-year to RM46.8mil. This was likely due to the higher prize payout ratio of 74.6%, based on out estimates, in 1Q17 compared to 69.3% in 4Q16,” it said.

No dividends were declared for the quarter versus 1Q16 DPS of 4 sen.

Magnum and its unit Magnum Holdings Sdn Bhd (MHSB) had received respective notices of assessment from the Inland Revenue Board of Malaysia (IRB) for the years of 2008, 2011-2015
(Magnum) and 2008-2013 (MHSB), totalling RM476.4mil.

These assessments follow the disallowance of deduction for interest expenses on certain investments. Management stated that it is looking to contest the validity and legality of the notices.

“Should Magnum be forced to fork out the full amount of RM476.4mil (equivalent to 33 sen per share), the tax bill would more than wipe out the group’s FY17F net profit of
RM161mil (based on our estimates).

“However, we think that the company will negotiate with the IRB on the payment terms and duration, given the substantial amount involved. We believe this would take years to resolve, judging from the tax disputes of other Malaysian listed companies.

“Given the weaker-than-expected 1Q17 results, we cut our sales per draw assumptions and increase our prize payout ratio estimate from 68% to 70%, resulting in FY17F-19F EPS cuts of 19%-20%. We also lower FY17F-19F annual dividend assumptions to 13 sen (from 15 sen), which translates into lower dividend yields of 6.2% (from 7.1%-7.2%),” said CIMB Research.


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