PETALING JAYA: Is the outlook for Magnum Bhd turning brighter after the gaming concern’s shocking tax issues?
Some analysts are warming up to Magnum’s prospects, while others remain negative.
UOB Kay Hian Research’s seasoned analyst Vincent Khoo shot out a contrarian view on the stock, calling it a “buy” on the strength of it improving its operations, potentially restoring its dividend payout, monetising a key asset and possibly suffering lower penalties than expected by the Inland Revenue Board (IRB).
Recall that on May 15, the numbers forecast operator (NFO) was served with notices of assessment with a penalty totalling RM476.5mil from the IRB.
However, the company felt that it had reasonable grounds to fight the notices’ validity and the penalty imposed, and appointed solicitors for the case.
On June 6, the Kuala Lumpur High Court accorded an interim stay of proceedings until July 19.
This gave the company some breathing space to sort things out, pending a judicial review on July 19.
While Khoo said it’s too early to decide if Magnum would win the case, he believed that the company might incur a smaller penalty based on the grounds made by Magnum.
Since Magnum announced the IRB’s tax penalty on May 19, the counter had seen a sharp fall in its share price, closing 22 sen down or 10.48% at RM1.88 after an intra-day low of RM1.81. A total of 22.46 million shares changed hands.
The steep fall in the share price wiped out RM327.3mil in market capitalisation in just one day.
The shares were at their lowest on June 2 at RM1.68.
And after Magnum won its appeal for the interim stay, its share price improved slightly and is now trading at RM1.71. At this price, the company is worth RM2.42bil.
And a day after Khoo released his report on June 7, DBS Vickers analyst Cheah King Yoong also upgraded Magnum to a “hold” from “fully valued” previously.
Cheah predicted that Magnum would trade at RM1.75 within a year, implying a 2.3% increase from the last close. The target is 14% below the consensus average of RM2.04.
Meanwhile, two research houses have downgraded Magnum after it was slapped with the tax bill.
CIMB Research has downgraded the stock from a “hold” to a “reduce”, with a lower target price of RM1.85 from RM2.08 previously.
Similarly, Public Investment Bank Bhd (PublicInvest) has reduced Magnum to “underperform”, with a target price of RM1.70 against RM2.35 previously.
CIMB said that it could take years for Magnum to resolve the tax issue, judging from tax disputes of other Malaysian listed companies, while PublicInvest noted that the weak results and tax penalty could cast a large overhang on Magnum’s shares in the interim.
Overall, analysts have lowered their consensus one-year target price for the stock by 13% in the past three months. The poll shows a forecast range of RM1.70 to RM2.40.
Magnum did not respond to StarBiz’s email queries when contacted.
Magnum comes in fifth in terms of generosity in dividends on the list of companies on Bursa Malaysia.
The company had a dividend yield of 6.07% last year and a dividend payout ratio of 96.94%.
As Khoo pointed out, Magnum’s dividend-yield appeal still holds.
Despite profits and revenue being on a downstrend since financial year 2012 (FY12), Magnum has not failed to pay out dividends every quarter.
The lacklustre earnings saw a reduction in dividend payouts, net assets per share and return on equity over a five-year period, according to Magnum’s 2016 annual report.
Based on Khoo’s assessment, the stock will still offer at least a 3.9% dividend yield, provided that Magnum pays a smaller penalty of less than RM400mil, fully funds the tax bill via borrowings with four to six-year loan tenures, its existing debt and cash level remains status quo, and fully distributes its remaining generated cash flow as dividend in 2017.
But the intense competition from illegal NFOs, weak consumer sentiment and a higher price payout ratio of 70% had impacted Magnum’s earnings in the first quarter ended March 31.
Earnings were down 55.6% to RM30.57mil against a lower revenue of RM697.08mil from RM752.56mil previously, mainly due to a 7.4% decrease in gaming sales to RM697.1mil.
Magnum did not propose any dividend for the first time in four years. It declared a dividend of four sen in the first quarter of 2016.
On its prospects, the group expected gaming revenue to be moderate this year impacted by the illegal NFOs, but said it would go all out in its marketing strategies and product innovation to mitigate the sales decline.
So, will Magnum declare dividends in the second quarter?
Based on its financial track record, the first-quarter results were exceptionally weak, owing to the challenges it underwent last year.
The other potential catalyst for Magnum’s growth is its efforts to come up with new games to spur sales. It introduced mGOLD, a 6D jackpot game, last month. This is a derivation of the 4D Jackpot Gold introduced previously.
Classic 4D games make up 85% of total ticket sales and Magnum’s 4D Jackpot has the largest market share in terms of ticket sales. Interestingly, there is also talk about Magnum wanting to cash out from its 6.3% stake in U Mobile, a mobile operator under the Berjaya Group.
U Mobile, according to UOB Kay Hian’s Khoo, has a book value of RM260mil and seems to be on track to gain positive earnings before interest, taxes, depreciation and amortisation this year. There are also rumours about U Mobile’s initial public offering (IPO) in 2018.
“Magnum intends to cash out from its investment in U Mobile to enhance its well-established capital management practice. It might cash out to a private equity investor ahead of the IPO,” said Khoo.
But talk of an IPO has been ongoing since 2015 with no definite answer from U Mobile, the country’s youngest telecommunications operator. Launched in 2007, U Mobile has made an impact on the market as its subscriber base has grown from less than 50,000 to over four million in less than five years.
According to reports, Straits Mobile Investments Pte Ltd, a unit of Singapore Technologies Telemedia, is the single largest shareholder in U Mobile with a 49% stake.
U Telemedia Sdn Bhd, a private investment by local tycoon Tan Sri Vincent Tan, is the second-largest shareholder with a 21.46% stake, followed by the Sultan of Johor Sultan Ibrahim Ibni Almarhum Sultan Iskandar (15%).
Magnum had a cash pile of RM387mil and debt of close to RM1mil as of March 31.