Spackman Entertainment Group - RHB Invest 2016-10-13: A Hallyu Star At Its Inflection Point

Spackman Entertainment Group - RHB Invest 2016-10-13: A Hallyu Star At Its Inflection Point SPACKMAN ENTERTAINMENT GRP LTD 40E.SI

Spackman Entertainment Group - A Hallyu Star At Its Inflection Point

  • We initiate coverage on Spackman, a top-tier South Korean movie producer with a BUY and a TP of SGD0.22, based on a 15x FY17F P/E. 
  • The group, probably in the best health since its IPO, is primed for a strong turnaround due to a few key near-term catalysts: 
    1. Its upcoming movie, Master, to be released in December; 
    2. A 27.2% share stake in SMG likely worth ~USD45m; 
    3. It can sell SMG to raise cash for special dividends/share buybacks; 
    4. Divestment of loss-making Opus Pictures cuts SG&A costs by 70%.


Potential blockbuster movie, Master, to turn Spackman Entertainment Group (Spackman) profitable. 

  • Master – a crime action drama starring A-list actors Gang Dong-won, Lee Byung-hun and Kim Woo-bin – hits cinema screens in December. The first trailer for Master generated a remarkable interest from viewers when it was released over the recent holidays in South Korea. 
  • Our expectation of 7.5m in ticket sales would yield Spackman profits of USD5.6m and bring it back into the black.


Spackman Media Group (SMG) a hidden gem. 

  • Spackman owns 27.2% of SMG, the largest entertainment talent agency in South Korea. SMG manages > 60 artistes, including A-listers such as Son Ye-Jin, Song Hye Kyo and Yoo Ahin. 
  • We estimate Spackman’s stake in SMG to be worth ~USD45m which is higher than its current market cap from a peer comparison, coupled with recent deals completed. Cash raised from any stake sale of SMG shares to potential content provider partners could likely be used to fund movies in FY17, as well as share buy-backs or a potential special dividend.


Loss-making Opus Pictures LLC divested, SG&A costs cut by ~70%. 

  • With the divestment of loss-making Opus Pictures significantly reducing the SG&A costs, this event would likely be an additional drive to bounce Spackman back into profitability. 
  • Its other production house, Zip Cinema Co Ltd, has a good track record and aims to make 1-2 movies pa which, coupled with Spackman’s joint ventures to make additional movies, could spur the growth going forward.


Significant Chinese interest and potential partnerships. 

  • Chinese firms sank > USD870m in South Korean content providers in 2010-2015. These include behemoths Dalian Wanda Group, Alibaba and Huayi Brothers Media Corp (Huayi Brothers). This strong interest is likely to pave the way for more partnerships/collaborations for Spackman, like the one with Alibaba Pictures.


Valuation 


Trading at a significant discount to overseas peers. 

  • Spackman’s foreign peers are currently trading at an average of 46.6x while its local peers are trading at a 32.4x average. Due to the catalysts in place, we expect the group to turn around in FY17.
  • We have decided to ascribe 67% and 53% discounts to its foreign and local peers’ averages respectively. This is due to Spackman’s relatively smaller scale when compared with its foreign peers, as well as the high degree of uncertainty when it comes to the success of a movie.
  • As such, we arrive at a 15x FY17F P/E multiple for a premium South Korean movie producer. Despite such a huge discount to its local and listed peers, our SGD0.22 TP represents a potential upside of c.97% from its current trading price.

More upside can be expected. 

  • We can expect more upside with the sale of Spackman’s stake in SMG, which is worth more than its current market cap. SMG’s listing in Hong Kong would further increase the value of the group’s holdings in its associate, if successful.
  • In addition, our FY17 estimates are premised on a conservative base case scenario for ticket sales. If Spackman’s movies perform better, its NPAT could further increase significantly.


Key Risks 


Lack of earnings visibility due to the inherent nature of the business. 

  • Operating in the film industry comes with a relatively high degree of uncertainty. The success of a film depends greatly on the timing of the movie’s release as well as the response from the audience. The latter can be hard to predict and understand. 
  • In addition, casting for roles in a movie is subject to rapid shifts in popularity or fame of actors and actresses. Hence, the sentiment of the audience and general acceptance largely determine if a movie is a box office hit or miss.

Large fluctuations in financial performance. 

  • Due to the large initial capital outlay for a movie production, the success or failure of a film would most likely have a material impact on a company’s financials. The number of films in the pipeline is also dependent on the general trend in the entertainment industry. 
  • Higher interest from investors and commercial demand from the public spells more films being made in the future. These fluctuations make it challenging to forecast the future profitability of films, since a track record of previous commercial successes does not directly translate into future box office successes.

Lack of financing options. 

  • As Spackman invests its own capital in films, it is likely to seek other investors to finance film productions. Management has stated that the group does not engage in long-term agreements with regards to film financing. Hence, the terms of agreement rely on general market conditions and investors’ expectations. Therefore, Spackman may have to accept less-than-ideal terms or even give up producing specific films if it is not able to secure financing for such movies.

Erosion of market share from larger players. 

  • Given the competitiveness of the entertainment industry in South Korea, many of the market leaders are in a much better position to enjoy higher margins and exposure to the general market. The scope and breadth of services would undoubtedly eat into Spackman’s market share.
  • Moreover, an oversupply situation in the film industry would lead to much lower box office receipts. This is as the public usually selects – at most – a few films to watch at any given time. As Spackman is involved in the production of domestic films, it would also have to compete with a high volume of films made by other companies during local holiday seasons and festivals.

Highly dependent on filmmakers. 

  • Spackman’s impressive portfolio of movies thus far is largely attributed to filmmakers Lee and Suk. Their continual efforts in spearheading the films have proven to be vital for the group.
  • Being veterans in the industry, the success of Spackman’s films would largely depend on the two filmmakers’ judgments on various factors. These include deciding which artistes should take the role and determining the date of release of a movie, just to name a few.
  • Hence, it is crucial to retain their services, as the risk of their being poached by other film companies is rather high.




Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-13
RHB Invest SGX Stock Analyst Report BUY Initiate BUY 0.22 Same 0.22



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