Kedah 4D outlet closure: Only short-term pain as Magnum, Sports Toto poised for earnings recovery

EXCEPT from slashing the target prices of Magnum Bhd and Sports Toto Bhd by between 5%-6% following shut down of their outlets in Kedah effective Jan 1, CGS-CIMB Research expects both legal 4D (four-digit)-cum-or number forecast operators (NFOs) to see continued earnings recovery in their financial quarters ahead.

The research house trimmed Magnum’s FY2023F/FY2024F core earnings per share (EPS) by 5.4%/5.3% after factoring in the (i) loss of contribution from its Kedah outlets (2.7% of total) from January 2023 until further notice; and (ii) reduction in the number of special draws from 11 to eight following Prime Minister Datuk Seri Anwar Ibrahim’s directive on Dec 5.

As for Sports Toto, CGS-CIMB Research cut the former’s FY2023F/FY2024F/FY20255F core EPS by 2.1%/4.7%/4.7% after factoring in the (i) loss of contribution from its Kedah outlets (3.0% of total) from January 2023 and (ii) reduction in the special draws.

“Nonetheless, we believe the Kedah NFO outlet closures will further dampen already weak investor sentiment on both stocks (Magnum and Sports Toto) at least in the near term due to concerns over more severe crackdowns on the sector (eg outlet closures, restrictions on gaming activities and fewer special draws),” opined analysts Sherman Lam Hsien Jin and Foong Choong Chen in an update of both NFOs.


Notwithstanding the fact that the 4D outlet closure would exacerbate already weak sentiment on both stocks at least in the near term, CGS-CIMB expects Magnum’s core net profit to rise 22%-24% year-on-year (yoy) (up 25%-27% quarter-on-quarter [qoq]) to circa RM25 mil in 4Q 2022F on better NFO revenue.

“Thereafter, we see core EPS expanding 11%/9% yoy in FY2023F/2024F, thanks to continued NFO sales recovery to 84%/89% of FY2019 (pre-COVID) levels coupled with a normalisation of prize payout ratio and effective tax rate (the latter two in FY2023F),” projected the research house.

“Following earnings revision, we (also) foresee Sports Toto’s core EPS rising 10.4% yoy in FY6/2023F driven mainly by NFO sales recovery and normalisation of the effective tax rate (post the Cukai Makmur windfall tax in FY2022) before easing 1.8% yoy in FY6/2024F (full-year impact of the Kedah outlet closures) and growing 1.6% yoy in FY6/2025F.”

All-in-all, CGS-CIMB Research reiterated its “add” rating for both Magnum and Sports Toto. For Magnum, it slashed the NFO’s discounted cash flow (DCF)-based target price by 6% to RM1.70 (from RM1.80 previously) following its earnings cut while that of Sports Toto was trimmed 5% to RM1.90 (from RM2) for the same reason.

“Key potential re-rating catalysts are sequential NFO sales and dividend payout recovery while key downside risks are severe COVID-19 waves and further government crackdowns on NFOs,” added the research house.

At 9.12am, Magum was down 2 sen or 1.55% to RM1.27 with 453,000 shares traded while Sports Toto was 1 sen or 0.62% lower at RM1.61 with 79,700 shares exchanged hands. – Jan 3, 2023



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