This article first appeared in The Edge Financial Daily, on November 24, 2015.

Magnum Bhd
(Nov 23, RM2.61)
Maintain hold call with a higher target price (TP) of RM2.40: We maintain our “hold” recommendation on the group with a higher TP of RM2.40, based on a dividend discount model, upon rolling forward our valuation basis to financial year ending Dec 31, 2016 (FY16) and raising our dividend payout assumption to 90% from 85%.

The dividend yield of over 5% and share buy-back scheme should continue to support the share price.

The group reported third quarter ended Sept 30, 2015 (3QFY15) core net profit of RM38 million, dragged by lower revenue and higher-than-expected prize payout ratio.

Gaming revenue per outlet per draw for 3QFY15 fell 4.5% year-on-year due to lower ticket sales as a result of full absorption of the goods and services tax (GST) and weak consumer spending.

Prize payout ratio for 3QFY15 was estimated at 68%, which is substantially higher than its theoretical prize payout ratio of 63%.

Its nine months ended Sept 30, 2015 (9MFY15) core earnings of RM189 million accounted for about 77% of both our and consensus full-year estimates. The group declared a third interim dividend per share (DPS) of 2.5 sen.

This brings 9MFY15 DPS to 12.5 sen, implying a 95% payout ratio, which is higher than our estimate of 85%.

We maintain our earnings forecasts, but raise our FY15 to FY17 DPS projections by 4% to 6%, assuming a higher dividend payout of 90%.

We believe that the management can sustain the 90% dividend payout ratio (higher than management guidance of 80% and our previous assumption of 85%) without stretching its balance sheet in view of its strong free cash flow generation.

Although we have factored the GST impact into our earnings model, we remain cautious that near-term earnings could be dragged by continued weak consumer sentiment post-GST. — AllianceDBS Research, Nov 23