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Tuesday, 7 February 2017

(Tradeview 2017) Value Pick No. 4 : Magnum Bhd. (3859)



Dear fellow readers, 

This is my No. 4 value pick for 2017. 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :


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Value Pick No. 4: Magnum Bhd (Initial TP RM 2.35) 

Let me share a story with you all. When I first bought Magni Tech at around RM4.10 early 2016, I got feedback from a friend that I should not choose to enter retail / textile industry company when the retail sentiment was slowing down. Came year end 2016, I added even more position Magni Tech when it again fell to RM4.10. This time, one of my reader said I should not recommend Magni Tech anymore as it is a sunset industry. So how does this story relate to Magnum?

Well, for starters, Magnum like Magni, is a high DY stock. Also both have been criticized as sunset industry. But I like to call Magni Tech my dividend play counter. Which means, it is a stock that I like to invest in due to the high Dividend Yield per annum. Even if the whole year, the share price maintains the same, the Dividend Yield alone is high enough to justify my investment. This is the same as Magnum. When I entered Magni Tech at RM4.10, the DY then is around close to 4.8% which is higher than FD. Now if we were to look at Magnum at current price of RM2.15, the company is giving a DY of close to 5.6%. So in short, Magnum is my next dividend play counter for 2017. Excluding any capital gains, with the DY alone, it will justify my investment for the counter. 



Of course, one can argue the dividend track record for magnum has been on a downtrend for the past few years due to the proliferation of illegal gambling, weakening consumer spending and implementation of GST. These 3 issues are also the key causes for the revenue and profit of Magnum to decline.



For the past 3 years from 2014-2016, Magnum has shown continuous decline in terms of Revenue and also Profit. Profit margin has dropped from from 8.9% to 7.2% (as of 3Q). Based on the latest QR, for 3 Quarters, Magnum has achieved a revenue of RM2 Billion and Profit of Rm146 Million vs the Full Year 2015 Revenue of RM2.7 Billion and Profit of RM228 Million. It is unlikely for Magnum to surpass 2015 in terms of both topline and bottomline.



After sharing the negatives, there are several plus points to Magnum. There are a huge number of institutional funds holding Magnum and rarely any sell off by the substantial shareholders of the company.



 

I am of the view that the reason why the share price has been on a downtrend is due to the the topline and bottomline decline. However, I would go as far as to say the share price has already priced in the negatives. Having done that, any positive surprises will likely exceed expectation and push the share price upwards should the final Q results provides a steady showing. Looking at the 1 year stock chart, RM2.10 appears to have found the bottom. The downside for now is limited and there is potential for upside. Should the coming Q improves albeit marginally, the share price will definitely move upwards. Counters like Magnum, BJToto, are all foreign funds favourite. I am also confident if foreign funds return, Magnum would be a beneficiary as well. 





Another good thing about investing in high DY counter like Magnum which has been on a downtrend is the fact that the Dividend will cap the price fall. So long as the company can continue to issue the dividend at a certain rate, the share price will be supported. Which means the downside is limited. Additionally, BNM last year July surprised all by reducing the Overnight Policy Rate (OPR) to 3% from 3.25. If Malaysia economy continues to dwindle, BNM may further reduce rates in the near future. This will definitely make dividend counters like Magnum more attractive with their high DY of 5.6% to funds and money managers in the market.  

  
Generally, Tradeview group avoid GLCs due to leakages and poor management. However, many readers have been requesting for recommendation on Election play counters. Although we are against investing based on Election / Govt link stocks, Magnum would be one of those counters that may rally in the event of a General Election for Malaysia. The reason is because of Magnum's link to MCA specifically through Tan Sri Surin Upatkoon who also happens to be the owner of MPHB. Whilst this factor is not a key consideration, it is just another point to note. 


At current price of RM 2.15, Magnum is trading at 16.7x trailing P/E. Assuming the last Q EPS around 3-4 sens, this would bring the full year EPS to around 14 sens. Applying the same multiple of 16.7x, the valuation should be RM 2.34. I will set the initial TP for 2017 to be RM 2.35 for ease of reference. Assuming Magnum maintain their dividend payout per Q, this would bring the full year dividend to around 12 sens and at current price, the DY is 5.6%.

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Food for thought: 

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