Mm2 Asia - DBS Research 2017-11-03: Next Showing ~ Strong Growth

Mm2 Asia - DBS Vickers 2017-11-03: Next Showing: Strong Growth MM2 ASIA LTD. 1B0.SI

Mm2 Asia - Next Showing: Strong Growth

  • 2Q18 net earnings more than doubled y-o-y.
  • Core production and platform business on track for strong growth ahead.
  • Maintain BUY and TP of S$0.73.



Growth path on track. 

  • The latest set of results reinforces our view that mm2 is on track for solid growth ahead. Having a strong presence in the entire value chain of content creation and distribution further cements mm2's status as the leader in the media/entertainment industry. 
  • With a much larger and stronger scale, especially with the expected completion of the Cathay cinema acquisition at end-November, mm2 can now enjoy the synergistic benefits from the entire value chain.

Strong 2Q18 results. 

  • 2Q18 net earnings more than doubled to S$4.6m, on the back of a 45.4% y-o-y surge in revenue to S$31.4m. 
  • For 1H FY2018, net earnings came in at S$10.9m (+57.8% y-o-y), in line with our forecast excluding contribution from the proposed Cathay cinema acquisition.

Growth supported by core business and UnUsUaL; cinemas to build recurring income. 

  • We continue to project mm2's EPS to grow at a CAGR of 65% from FY16-FY19, underpinned by growth in productions, expansion into the China market, and contribution from UnUsUaL. The cinema arm, on the other hand, helps the group build a recurring income base.


Where we differ: Higher valuation peg vs consensus. 

  • We value the production business at 28x PE, in line with peers listed in Asia, vs consensus’ valuation of about 25x. 
  • For UnUsUaL, we value it at current valuation. For the cinema segment, we use 21x PE valuation peg.


Potential catalyst: Reaping the fruits of labour in North Asia. 

  • We expect North Asia to contribute > 70% of production revenue from FY18F, up from 36% in FY16 and 56% in FY17. 
  • Upside to earnings would come from more projects, especially in China, where the market is bigger and budgets are much higher.


Valuation

  • Reiterate BUY, TP S$0.73. 
  • Our target price of S$0.73 is based on sum-of-parts valuation on FY18F earnings except for event production & concert promotion, which is based on the current market value of UnUsUaL.


Key Risks to Our View

  • No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding.
  • Availability of good scripts. Lack of good scripts for production may lead to less support from stakeholders.


WHAT’S NEW


2Q18 net earnings more than doubled y-o-y, in line 

  • 2Q18 net earnings more than doubled y-o-y. 2Q18 net earnings more than doubled to S$4.6m, on the back of a 45.4% y-o-y surge in revenue to S$31.4m. For 1H FY2018, net earnings came in at S$10.9m (+57.8% y-o-y), in line with our forecast excluding contribution from the proposed Cathay cinema acquisition. 
  • Core business of producing, distributing and placing products for movies and TV/online content continues to form the majority of the group’s revenue, contributing approximately 40% of 1H FY2018 revenue.

Full 6-month contribution from UnUsUaL. 

  • The strong results were largely contributed by events production and concert promotion business by UnUsUaL Limited. UnUsUaL contributed a full six-month figure in 1H FY2018 as opposed to two months in 1H FY2017. 
  • UnUsUaL accounted for 35% of the group’s 1H FY2018 revenue. Gross margin of 46.5% was slightly higher than the 44.8% in 2Q17 but weaker than the 62.4% registered in 1Q18, mainly due to the absence of a fee-based only project in 1Q18.


Outlook 


Core production - 

  • Going forward, mm2 will continue to focus on its core business in Singapore and Malaysia as well as expand it to Hong Kong, Taiwan, China and also the US.
  • Productions in these markets are expected to continue to form a bigger part of its revenue into FY2019, especially from the North Asia. We expect North Asia to contribute about 70% of production revenue from FY18F, up from 36% in FY16 and 56% in FY17. As at 1H FY2018, revenue from North Asia contributed approximately 60% of the group's production revenue.

Platform business - 

  • The group has stakes in multiple platform businesses, following several strategic and synergistic acquisitions, which include Mega Cinemas, Lotus Fivestar Cinemas, UnUsUaL, as well as strategic investments in Cinema Pro and RINGS.TV
  • With the completion of the acquisition of cinema business from Lotus Fivestar Cinemas in September 2017, mm2 Asia is now officially the fourth largest cinema operator in Malaysia. The group is also proposing to acquire the cinema business of the Cathay Organisation in Singapore.
  • With the increase in demand for concerts and events in the region, UnUsUaL, with its dominant market position, is set to benefit from this rising trend. UnUsUaL will continue to leverage on the vibrant demand for concerts and events by well-known entertainers. 
  • Furthermore, the recent signing of the letter of intent to present 48 “Disney On Ice” shows could open the door for more Disney projects ahead.


Earnings and Recommendation 

  • No changes in earnings forecasts. We recently adjusted our forecasts to take into account the proposed acquisition of the Cathay cinema chain in Singapore. We are now expecting earnings growth of 33% for FY18F and another 32% for FY19F. 
  • Maintain BUY and target price of S$0.73, which is mainly based on sum-of-parts valuation on FY18F earnings, except for event production & concert promotion, which is based on the current market value of UnUsUaL.




Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-11-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.730 Same 0.730



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