Magnum hit by a slew of bad news
Ng Wai Mun 
The IRB has served Magnum a notice of assessment with regards to a RM477 mil penalty
NUMBERS forecasting lottery operator Magnum Bhd is looking less attractive, no thanks to a slew of negative news.

Investors are concerned over a potential tax penalty of RM476.4 mil being slapped on the company as well as sluggish earnings outlook and lower dividend payouts.

On a year-to-date basis, the stock is now down 21% to RM1.71 on July 27. The counter offers a dividend yield of 5% based on the current price.

Alliance DBS Research, vice-president of investment research Cheah King Yoong believes the share price decline is a combination of a few factors.

“Other than the poor Q1 results and unexciting earnings outlook, the decline in share price was also due to potential tax penalties.

We are concerned that the company may need to conserve cash to settle the potential tax liabilities, which could restrict its ability to maintain high dividends payouts.

This could derail its attractiveness as a high dividend-yielding stock,” he tells FocusM.

Cheah says the company has been consistently paying out more than 75% of its reported earnings every quarter over the past few years.

In FY16 ended Dec 31, Magnum declared a total dividend payout of 13 sen per share or 95.9% of its net profit, which was in line with its dividend policy to distribute at least 80% of its gaming net profit annually.

Public Investment Research notes that Magnum did not declare dividends in Q1 FY17, making it the first time it did not declare a quarterly dividend. In the same quarter last year, it declared a dividend of four sen per share.

For Q1 ended March 31, Magnum’s net profit plunged 55.6% to RM30.57mil from RM68.84 mil a year ago, mainly due to poor luck factor and lower-than-expected revenue, which fell 7.37% to RM697.09mil – the lowest Q1 revenue in the last 10 years.

Earnings per share fell to 2.15 sen in Q1 FY17 from 4.84 sen a year ago.

Cheah estimates the prize payout ratio was 71% for Q1 compared to the theoretical payout ratio of 63%.

He points out that Q1 is seasonally the strongest quarter for Magnum and typically contributes more than 30% of its full year earnings.

Luck factor

An industry player says while earnings can vastly be affected by luck in the form of the prize payout, the company’s sales are more reflective of consumers’ sentiments and demand for its games.

Similarly, Berjaya Sports Toto Bhd’s (BToto) local operations, via Sports Toto Malaysia Sdn Bhd, saw a drop in revenue and pretax profit of 4.1% and 43% respectively as the current quarter has a lower number of draws compared to the corresponding quarter last year.

The bigger drop in pre-tax profit was mainly due to an exceptionally lower prize payout in the previous year’s corresponding quarter.

BToto’s net profit declined 30.77% to RM72.5 mil for Q4 ended April 30 from RM104.71 mil a year ago, while revenue declined by only 0.5% to RM1.48 bil mainly due to higher revenue reported by the Philippine Gaming Management Corporation and H.R. Owen Plc.

According to an industry player, Magnum’s share price is also stifled by cautious sentiments as investors adopt a wait-and-see approach.

She believes the company will release its Q2 FY17 results sometime in the middle of next month. For now, the biggest concern weighing on the company is the ongoing legal case.

On May 15, Magnum announced that the company and its wholly owned subsidiary, Magnum Holdings Sdn Bhd were served notices of assessment from the Inland Revenue Board (IRB) with penalties totalling RM476.47 mil.

The assessments follow the disallowance of deduction for interest expenses on certain investments. The company is looking to contest the validity and legality of the notices.

“We believe an unfavourable decision for Magnum could lead to another round of sell-off as there will be rising investor concern that dividends will need to be reduced to finance the payment of tax liabilities,” Cheah says.

The market observer points out that investors are more worried about how Magnum will pay the penalties in the event it loses the case.

“It doesn’t have that much cash [RM387 mil as at March 31] but is in a net debt position [RM608 mil as at end March].

“But I do see the worst case scenario where, if the company has to pay the penalty, it will do so in trenches. This will conserve cash,” she says.

She believes reducing or even halting dividend payout for FY17 will partially help Magnum’s cash position.

In FY16, the dividend of 13 sen per share translated to a total dividend payout of RM185 mil. “Even if the dividend is halved to six sen, there is only a cash savings of RM90 mil,” she says.

This article first appeared in Focus Malaysia Issue 243.