Magnum Bhd
(March 26, RM1.86)
Maintain outpeform with a lower target price of RM1.95: Following the prime minister’s announcement yesterday on the movement control order (MCO) extension, Magnum Bhd’s outlets will remain closed until April 14. As such, all 12 draws from March 18 to April 14 have been cancelled. Based on our financial year 2020 (FY20) ticket sales assumption of RM18.1 million per draw, there will be a loss of RM217 million ticket sales in these four weeks. 

Given the depressed market condition, our 3% ticket sales growth per draw assumption of RM18.1 million for FY20 looks challenging. Thus, our growth assumption is reduced to 2% or RM17.9 million per draw. Our FY21 ticket sales growth assumption is also lowered to 2% from 3% previously.

With the new ticket sales assumption of 2% per draw and total draws for FY20 reduced to 154 from our previous assumption of 166, and an unchanged estimated prize payout ratio of 65%, our FY20 forecast is cut 8.2% and FY21 slashed slightly by 1.9% on a ticket sales growth of 2%, although our assumption of 166 draws is unchanged. 

Although there are 12 less draws for the year, we may see more special draws from eight currently given the special draws’ purpose is for emergency events and Covid-19 is a good reason for extra special draws to raise tax revenues for the government. However, as special draws come with an additional 10% tax, they have a minimal earnings enhancement for numbers forecast operators.

Magnum’s share price was initially unaffected by Covid-19 as the stock hovered around 9% below its 52-week high of RM2.90 throughout December 2019 to February 2020. However, the MCO, starting on March 18, escalated a selldown, pushing the stock to its 52-week low of RM1.70 last week — 41% from its peak. 

Given the depressed business environment due to restricted activities, Magnum’s earnings prospect is challenging and hard to forecast in the near term. We believe applying the price-to-book value (P/BV) valuation methodology is more appropriate in the current market conditions. 

Magnum and its peer Berjaya Sports Toto Bhd are now trading closer to their 1.5 standard deviation (SD) below a five year-mean of P/BV. Under the current environment, we will place a -1SD as the fair value level, while the ideal buying zone should be at -2SD assuming a full-blown financial crisis. — Kenanga Research, March 26