Monday, November 27, 2006

Advice Given For Magnum Shareholders

Yes, one should NEVER had invested in Magnum given all the questionable issues and perhaps one should really LEARN the lesson of never investing in a company whose management are questionable.

Anyway, let me NOT rub it in anymore for you Magnum shareholders.

Here is an investment advice given by RHB Reserach.



Magnum Corporation

Offer Not Attractive For Minorities

Share Price : RM2.26 Fair Value : RM2.30 Recom : Market Perform (Upgraded).

Analyst : Low Yee Huap, CFA Tel : (603) 9280 2175 E-mail :

. MPHB make offer for Magnum. Multi-Purpose Holdings Bhd (MPHB), the parent of Magnum, has served a notice of offer to acquire the remaining 60% stake in Magnum that MPHB does not own. The offer price is RM2.30 per Magnum share amounting to RM1.976bn. It is the intention of MPHB to increase its stake in Magnum from 40% to 60% and maintain the latter’s listing status. The offer is expected to complete in 1Q07.

. Magnum to take Magnum 4D private. In another separate announcement, Magnum said that it has served a notice of offer to acquire the remaining 23.89% in Magnum 4D (M4D) that Magnum does not own. The offer price is RM3.00 per M4D share amounting to RM119.5m. Magnum does not intend to maintain the listing status of M4D. The offer is expected to complete in 1Q07.

. A faster avenue for MPHB to reach its target. MPHB has stated previously that it is the group’s intention to make Magnum a subsidiary (from the current associate stake). However, to prevent a GO, it is limited to an incremental increase of 2% per annum. With the current stake of 40%, it will take MPHB another five years to achieve its goal. This offer would be a faster avenue to achieve its target.

. Don’t take the MPHB offer. Although the offer price is higher than our previous fair value of RM1.90, we are recommending that shareholders DO NOT take the offer for the following reasons:

1. Offer price is below our conservative SOP of RM2.53. Note that we have assigned zero value for its investments and properties as well as a 50% discount to its loan debtors. If we add back these assets at cost (as at Sep 06), it will boost our SOP by circa 70 sen.

2. Our conservative SOP and previous 25% discount to SOP were premised on concerns about its non-operating risks and higher luck factor risk as well as inability to unlock low yielding assets (properties). Although there is value in the stock, we believe that without a massive clean up (loan debtors and investments), clear cash management policy and return of excess cash, it will be hard to crystalise the values.

3. Despite that, investors should not opt out of the stock cheaply and reduce their rights to have a more effective "check and balance".

. Earnings enhancement to privatise M4D. With elimination of minority interests, Magnum’s earnings are expected to rise by about 4-5% per annum.

. M4D shareholders should take the offer, in our view. This is due to the following reasons:

1. The structure between the two companies, M4D’s earnings are very volatile as it has to fund the prize payout. Prize payout is eratic given that it has relatively higher luck factor risk (arising from bigger bet size).

2. The above has contributed to M4D’s lacklustre share price performance.

Average transacted price of M4D over the last one year was only RM2.48, way below the offer price of RM3.00. Moreover, over the last 20 months, M4D’s share price only briefly crossed the RM3.00 mark three times.

3. M4D lacks liquidity as Magnum already own 76.1% of the stock.

. Upgrade to Market Perform. We remain wary about its opaque cash management policy as well as other non-operational risks. However, in view of the offer, we believe share price is likely to be sticky at around the offer price level. Thus, we have raised our fair value for the stock to RM2.30 and upgrade our recommendation to Market Perform..