MAGNUM CORP BHD Consensus net profit estimate FY12/2003: RM256.05 million
JP Morgan Research
Result: Magnum Corp Bhd just released its results for the year-ended December 2002. For the fourth quarter ended Dec 31, 2002, Magnum registered net profit of RM38.06 million from RM47.67 million in the same quarter of the previous year.
But turnover increased to RM610.78 million from RM571.79 million. On a full year basis, net profit dropped to RM201.25 million from RM230.65 million. Turnover also decreased to RM2,421.04 million from RM2,518.01 million.
Comment: The financial year (FY) 2002 results were below expectations. FY02 net profit of RM201 million was 11 per cent below our forecast and 15 per cent below market consensus. These poorer-than-expected results were due mainly to the sluggish number forecasting operator (NFO) sales and high-prize payout ratio.
In its NFO operation, same-draw revenue in the fourth quarter of 2002 fell by 7 per cent, while for the full-year the same-draw revenue declined 5 per cent. This is not surprising given the continued penetration of the illegal 4-digit (4D) market, repatriation of foreign workers in mid-2002, and the negative substitution effect from the 2002 World Cup betting.
For 2003, we expect NFO sales to register (1) an 8 per cent growth owing to the 25 per cent increase in first-prize payout and (2) an 8 per cent increase in total prize payout effective January 1, 2003.
Prize payout was also high. From the numbers, we deduced that Magnum incurred a prize payout ratio of about 64 per cent, a full 3 percentage points higher than the theoretical average of 61 per cent.
To recap, a 1-percentage-point increase in prize payout ratio should reduce the group's net profit by about 8 per cent. For 2003, we are assuming that Magnum will incur a theoretical prize payout of 66 per cent post the recent prize hike.
In the results, Magnum also reported that it spent RM24.8 million on equity purchases. However, we are not worried about this as most, if not all, of their investments were for Magnum 4D, its gaming subsidiary. In the fourth quarter of 2002, Magnum increased its stake in magnum 4D by about 6 million shares, bringing its total stake to 62 per cent.
We are not surprised with the purchase as this fits in with Magnum's plans to take Magnum 4D private in the longer term.
Recommendation: With the increase in prize payout from January 2003, NFO sales should have turned the corner and we expect growth to start filtering through in 2003. Moreover, Magnum does not have a burden of sponsoring the Formula 1 anymore and this implies another 8-10 per cent boost to its net profit number. Magnum remains our top pick in the sector.
The potential increase in the number of operating outlets could add another 8 per cent to earnings while further liberalisation measures should not be discounted. At current price, the stock is trading at a FY03E price earnings (P/E) of 12.9x, core gaming P/E of 7.7x, and a dividend yield of 5 per cent.
Nestle (M) Bhd Consensus net profit estimate FY12/2003: RM209.45 million
Result: Nestle (M) Bhd's 2002 turnover and net profit fell 4.1 per cent y-o-y to RM2,479.6 million and 10.5 per cent y-o-y to RM182.6 million respectively. Net tangible asset per share was RM1.54. Final net dividend proposed was 45 sen, bringing total net dividend for 2002 to 81.6 sen.
Comment: 2002 net profit was 7.4 per cent and 8.7 per cent below consensus and our estimates respectively. Management attributed the lower profit to 1) lower consumer base, 2) decision to reduce its inventory level at the trade and 3) higher raw material prices as well as higher packaging cost.
During the year, despite an overall decline in the majority of packaged food categories in Malaysia, Nestle continued to increase activities in the trade to maintain the product visibility and interest in the market.
As a result, it has to reduce its trade inventory level in the fourth quarter of 2002, causing profits to decline. For the fourth quarter of 2002, cocoa prices have increased 1.3 per cent q-o-q and 67.9 per cent y-o-y while palm oil prices have increased 6.6 per cent q-o-q and 53.3 per cent y-o-y.
Similarly, coffee prices have also increased 16.1 per cent q-o-q and 21.1 per cent y-o-y. The only consolation is milk prices have declined 48.9 per cent y-o-y.
However, milk prices have started to edge up again. We are adjusting our sales forecast down by 3 per cent to 4 per cent for the lower-base effect in 2002.
Recommendation: As a result, our earnings 2003-2005 have been adjusted downwards by 6.9 per cent to RM197.8 million, 7.5 per cent to RM218.5 million and 8.3 per cent to RM233.0 million respectively.
At our adjusted earnings per share 2003 of 84.3 sen, Nestle is trading at hefty price earnings of 23.1x. If the final dividend is approved, net dividend yield for 2002 is 4.2 per cent. Maintain hold.
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