Spackman - Blockbuster Master To Solidify Turnaround
- We maintain BUY on Spackman Entertainment Group, a top-tier South Korean movie producer, with a TP of SGD0.32, based on 18x FY17F P/E.
- The group, which is probably in its best health since its IPO, is primed for a strong turnaround due to a few key near-term catalysts:
- Master’s big success;
- A 27.2% share stake in Spackman Media Group (SMG) likely worth ~USD45m;
- It can sell SMG to raise cash for special dividends/share buybacks;
- Divestment of loss-making Opus Pictures cuts SG&A costs by 70%.
Laying the foundations.
- The divestment of Spackman Entertainment Group’s (Spackman Entertainment) loss-making subsidiary Opus Pictures should cut SG&A costs significantly by c.70% and help it to return to the black in FY17.
- Its other production house, Zip Cinema, has a good track record and aims to make 1-2 new movies pa.
- Coupled with Spackman Entertainment’s JV to produce other movies, all these factors combined should spur growth, going forward.
Spackman Media Group (SMG) is a hidden gem.
- Spackman Entertainment owns 27.2% of SMG, the largest entertainment talent agency in South Korea.
- SMG manages > 60 artistes, including A-listers like Son Ye-Jin, Song Hye Kyo and Yoo Ah-in. We believe the company’s stake in SMG is estimated to be worth ~USD45m, which is about 85% of the former’s current market cap.
- Cash raised from any stake sale of these SMG shares to potential content provider partners would likely to be used to fund movies in FY17F, share buy-backs and a potential special dividend.
Master to solidify earnings turnaround.
- Over the Christmas holidays, Master has been a big hit, accumulating over 3m ticket sales and capturing over 55% of Korea’s ticket revenue share just over four days of its release, affirming its status as a blockbuster. Its popularity exceeded our expectations.
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).
- The strong interest is likely to pave the way for more partnerships/collaborations for Spackman Entertainment, like the one with Alibaba Pictures.
One-off gain turned 3Q16 into profitability.
- The disposal of its loss-making subsidiary Opus Pictures greatly supported Spackman Entertainment’s 3Q16 results and helped to reduce its 9M16 net loss to USD1.65m (2Q16: USD4.86m).
- A USD2.13m one-off gain was recorded from the disposal of Opus Pictures.
Maintain BUY, with a TP of SGD0.32.
- We believe that Spackman’s outlook is at its best since its IPO. The company is primed for a strong turnaround.
- A near- term positive catalyst would be the success of its recent blockbuster movie, Master.
- A key downside risk is the lack of earnings visibility due to the inherent nature of its business.