mm2 Asia - DBS Research 2018-02-08: Growth Intact

Mm2 Asia - DBS Vickers 2018-02-08: Growth Intact MM2 ASIA LTD. 1B0.SI

mm2 Asia - Growth Intact

  • Newly acquired cinemas boosted 3Q18 revenue but dragged down margins.
  • Tweak margins lower; earnings cut by 9-11%.
  • Maintain BUY, Target Price of S$0.75, as we rolled forward valuation to FY19F.



Growth path on track. 

  • We continue to expect strong earnings CAGR of 28% for FY17-20F, 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. 
  • 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 completion of the Cathay cinema acquisition, mm2 can now enjoy the synergistic benefits from the entire value chain.


3Q18 Results: 

  • 3Q18 revenue surged 190% y-o-y to S$52.4m, boosted by newly acquire cinemas in Malaysia and Singapore.
  • Net earnings jumped by a smaller 53% to S$6.4m on lower margins.


Where we differ: Higher valuation peg vs consensus. 

  • We value the production business at 25x PE, in line with peers listed in Asia, vs consensus’ valuation of about 22x. 
  • 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, Target Price of S$0.75. 

  • Our sum-of-parts target price is now S$0.75, after accounting for slightly lower revenue from the cinema, higher interest costs and rolling forward our valuation to FY19F earnings on valuation peg of 25x.


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.
  • Unavailability of good scripts. Lack of good scripts for production may lead to less support from stakeholders



WHAT’S NEW - 3Q18 results boosted by cinema acquisitions 


Newly acquired cinemas boosted revenue... 

  • Group revenue surged 190% to S$52.4m, mainly due to the acquisition of the Lotus cinemas in Malaysia and Cathay cinemas in Singapore, and also its core production business and UnUsUaL, the event production and concert promotion arm.
  • Nine-month revenue accounts for 65% of our FY18F revenue, roughly in line, as Cathay cinemas only account for one-month contribution. Gross profit jumped 172% y-o-y to S$24.2m.
  • ...but dragged down margins: 3Q18 net margin eased to 12.3%, from 14.6% in 2Q18 and 23.3% in 3Q17, partly due to the increasing contribution from the cinema arm, which has lower margins, and also the one-off expenses for the recent cinema acquisitions.


OUTLOOK - Core production 


Expect key contribution from North Asia. 

  • 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 North Asia. 
  • We expect North Asia to contribute about 70% of production revenue from FY18F, up from 36% in FY16 and 56% in FY17. For 9-month FY18, revenue from North Asia contributed approximately 76% of the group's production revenue.

Seeking listing of Vividthree on Catalist. 

  • mm2’s subsidiary Vividthree is seeking listing on the Catalist board of SGX. mm2 acquired a 51% stake in Vividthree, a 3D animation company, in early 2015 for S$3.06m or a PE of about 3x.
  • Incorporated in 2006, Vividthree has grown to become a leading player and go-to studio in the field of visual effects (VFX), 3D animation, virtual reality and computer generation imagery (CGI) in Singapore. 
  • Though Vividthree’s contribution to mm2 is still small now, accounting for 5-6% of the group’s revenue and gross profit in FY17, a successful listing should provide more visibility to attract the best talents for its management, which is crucial for the creative business, and pave the way for higher growth ahead, while parent mm2 can unlock value.


OUTLOOK - Platform business 


The only cinema operator in both Malaysia and Singapore.

  • mm2 is now the second largest cinema operator in Singapore, following the completion of the Cathay cinema acquisition in November last year. In Malaysia, it is the fourth biggest player, with ownership of 18 cinemas. 
  • The group is now the only cinema operator in Malaysia and Singapore, with major presence in both countries, and is in a strategic position to optimise its capital expenditure and reach out to a wider audience, thus reaping economies of scale.

UnUsUaL benefitting from rising demand for concerts and events. 

  • 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. It will continue to expand into the region and also to bring in more western concerts. 
  • 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 & Recommendation 


FY18F to FY19F earnings cut by 9-11%. 

  • We have lowered FY18F to FY19F earnings by 9-11%, after accounting for slightly lower revenue from the cinema segment and higher interest costs. We continue to expect strong earnings growth CAGR of 28% for FY17-20F, driven by all its core production and platform businesses. 
  • Maintain BUY, new target price of S$0.75, after rolling forward the sum-of-parts valuation to FY19F earnings, and also lower valuation peg of 25x (vs 28x previously), except for event production & concert promotion, which is based on UnUsUal's current market value.







Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2018-02-08
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.750 Up 0.730



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