MM2 ASIA LTD
41C.SI
MM2 ASIA LTD (MM2 SP) - The Show Must Go On
WHAT’S NEW
• mm2 recently announced that it has entered into a non-binding term sheet for the acquisition of a 51% stake in the UnUsUal group of companies for S$26m.
- Under the terms of the acquisition, mm2 will consist of an initial signing fee of S$6m payable upon finalising the sale and purchase agreement.
- A maximum first tranche is payable in Jan 17, consisting of S$4m in cash and S$6m in shares based on the net profit after tax achieved by UnUsUal group for FY16.
- The final payment of maximum S$10m will be payable in Jan 19 based on pre-set net profit targets for 2016-18.
- Assuming a forward 2016F net profit after tax of S$5m, mm2 will be making an earnings-accretive acquisition for 51% of the business at 10.2x 2016F PE.
OUR VIEW
• Not an unusual acquisition.
- The heart and soul of the UnUsUal group of companies is in the rental and operations of sound, stage, lighting and video equipment in Singapore. They are a market leader in this segment with a client list which includes Singapore F1 Grandprix, the National Stadium and the Youth Olympic Games.
- We believe that their background and expertise in the technical department has given the company the platform to expand into concert promotion and production, as they have less reliance on third-parties and might even be more competitive in terms of pricing their services.
- From a strategic point of view, we are positive on the acquisition as it will propel mm2 into becoming the largest entertainment group in Singapore with synergistic business activities, a more diversified revenue stream and stronger network in Hong Kong and Taiwan.
• Healthy industry margins.
- Our channel checks show industry gross margins to be around 40% and net profit margins to be around 25%. Given these numbers, our estimates indicate UnUsUal group’s turnover to be around S$20m for FY15 using an NPAT of S$5m.
- Assuming our channel checks are accurate and the acquisition is finalised, we would expect an improvement in net margins for mm2 for 2017 due to the full-year profit contribution from UnUsUal Group.
- We expect the acquisition to be completed in about 12-13 weeks or by the end of Apr 16.
• SGX’s approval of private share placement provides sufficient cash.
- SGX has approved the total placement of 6.35m shares to Hesheng Media, Apex Capital and Maxi-Harvest Group for a combined consideration of S$5m or S$0.7872 per share. The proceeds and a portion of the existing cash balance will provide the necessary cash to fund the initial signing fee.
- As the purchase agreement has not been finalised, we have not incorporated the earnings attributable from the acquisition and kept our forecasts unchanged.
VALUATION
- Maintain BUY with a PE based target price ofS$1.01, pegged to the sector’s 20.3x FY17F PE.
Nicholas Leow
UOB Kay Hian
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http://research.uobkayhian.com/
2016-02-10
UOB Kay Hian
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