KUALA LUMPUR, Aug 14 —  Shareholders of gambling company Magnum are hoping it will maintain its 5 sen per share dividend when it reports Q2 earnings soon, even though management has been pessimistic in its outlook.

In the Q1 earnings results, announced on May 21, management said it believes 2014 will be a challenging year due to rising living costs which will lead to a moderation in consumer spending.

It would continue marketing and branding efforts to sustain its revenue, it said then.

Magnum is a number forecast operator (NFO).

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It currently operates the Magnum 4D Game and two extensions to the main game – Magnum 4D Mbox and Magnum 4D Jackpot.

Its competitors in the Malaysian market are Berjaya Sports Toto (which is known for its Toto game) and Pan Malaysian Pools (known for its Da Ma Cai game).

This is how earnings looked for Q1FY14 ended March 31, announced May 21:

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Revenue: -7 per cent to RM 792.5 million

Profit: -45 per cent to RM 84.7 million

Cash flow from operations: RM 132.2 million vs RM 172.5 million

Dividend: 5 sen per share vs 0 sen per share

Magnum said revenue for its gaming division, which makes up most of the group’s revenue, dropped by 6per cent year-on-year to RM 792.4 million because of more cautious consumer spending, and more customers winning the 4D Jackpot 1 prize just before the Chinese New Year festive season.

The profit for its gaming division was also lower by 28 per cent at RM 119 million due to its lower revenue and a higher prize payout ratio in the quarter.

Investor Central. We keep your investments honest.

1. Why have sales been falling during the seasonally strong Q1?

Public Bank in a report in May said Magnum’s revenue per draw resumed its declining trend by falling 6.4 per cent year-on-year.

The analyst said it is particularly worrying as Q1 is supposed to be seasonally stronger with Chinese New Year driving sales.

But Chinese New Year has been giving little cheer to Magnum’s gaming segment for some time now.

In Q1 FY10, its gaming segment’s revenue was RM 919.1 million, a healthy 20 per cent increase over Q1 FY09.

But since Q1 FY10, except for a marginal improvement in Q1 FY13, its number has declined to the current RM 792.4 million in Q1 FY14.

Is Magnum resigned to falling sales every Q1?

2. Will ticket sales remain depressed this FY?

In fact, the gaming revenue has been declining for the past four years.

Magnum Bhd was known as Multi Purpose Bhd previously, and it had more business segments like financial services, stockbroking and property, until it sold them off and became Magnum Bhd with the gaming segment as its main revenue driver.

And it is more accurate to look at the group’s gaming segment over the years instead of its overall revenue.

According to a report by AMMB, it sees future ticket sales for the industry as remaining weak due to the higher cost of living and competition from illegal operators.

Does Magnum Bhd forecast this FY to show a lower revenue for its gaming segment?

3. How much is its market share declining?

Magnum’s declining revenues mean its market share is declining.

Even Public Bank thinks that with Magnum struggling to maintain market share in a challenging environment, it is reducing its revenue forecast by cutting its revenue per draw assumptions by 2per cent.

Maybank has forecast a similar decline.

Magnum should be aware of its declining market share.

But how much is it declining?

4. What ideas does Magnum’s management have to reverse its revenue slide?

Magnum must not sit still while revenue and market share are declining.

It faces stiffer competition from its two rivals, and more government subsidy cuts to come this year that will further dampen consumer sentiment.

While Magnum cannot make quick changes and additions to its system and games, management must come up with some ideas to offset this potentially dangerous situation.

5. Will the World Cup in Brazil actually affect sales?

Broker AMMB said in a report in May that they did not expect the 2014 FIFA World Cup in Brazil to affect ticket sales significantly.

But it is known that punters can divert their financial resources to a more exciting and current gaming medium.

Although it is a bit of a stretch to link 4D buyers to investors, it was reported by Singapore’s Channel NewsAsia on 20 June that trading activity at Singapore’s stock exchange went down during the World Cup – it reported some analysts as saying that the average monthly value traded had dropped by 25per cent because of the World Cup.

The report even had an interesting quote from remisier Jimmy Lim of UOB Kay Hian: “The casino, the World Cup, the stock market, they all fight for the pie from retail investors, so basically the drop in volume is from the World Cup season. As for the fundamentals, even the slightly better news from the Fed did not see any kind of a direct response.”

How did the World Cup in Brazil affect sales in Q2FY14?

6. Will GST be a big risk to the business?

According to CIMB in a report on 22 May, Magnum faces a key risk in the implementation of the GST in April next year.

CIMB says there has been no progress on negotiations to offset the impact of the GST against the gaming tax.

The broker believes it will be a breakthrough if gaming tax is recognised as a sales tax.

According to an article by The Star in September 2013, NFOs (Number Forecast Operators) like Magnum are subject to an 8per cent gaming tax and an 8per cent pool betting tax by the Malaysian government.

What is the latest news on negotiations?

If the GST is imposed on top of the current gaming and pool betting tax, how will it affect Magnum? Has it planned for such a scenario?

7. When will it sell a stake in U Mobile?

Magnum has a 6.3per cent stake in mobile operator U Mobile.

With U Mobile playing down plans of an IPO as it wants to take more time to grow bigger, will Magnum sell off its stake privately, or will it hold on to the stake till U Mobile’s eventual but late IPO?

We are sure investors will be keen to hear about this answer as it presents a possible cash bonanza for them if the U Mobile stake is sold off.

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do.

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