MM2 ASIA LTD - UOB Kay Hian 2016-03-24: Hitching The Wagon Towards A Different Kind Of Star

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MM2 ASIA LTD 41C.SI 

MM2 ASIA LTD (MM2 SP) - Hitching The Wagon Towards A Different Kind Of Star 

WHAT’S NEW 

StarHub acquired a 9.05% stake in mm2 Asia (mm2) for S$18.04m or S$0.41 per share. 

• This is a 19.2% discount to the volume weighted average price of S$0.5077. 
• Given the benefits that a large strategic partner will bring to the table and the vote of confidence, we believe the acquisition price is fair. 

Collaboration on original local productions for about S$25m. 

• mm2 and StarHub signed a non-binding MOU to cooperate and collaborate on the production and distribution of original local productions for up to S$25m over a three-year period. The content created by mm2 will go out to 536,000 StarHub TV households in Singapore, with an aim to leverage its existing regional advertising, distribution and co-production resources to further monetise these concepts. 

Since our BUY initiation in Jan 16, the stock has been a stellar performer, rising 45% since initiation. 

• We believe that the fundamentals remain intact and we now apply a 10% premium to the sector peers’ average PE ratio. 
• We believe that the premium is warranted based on: 
  1. superior FY17 EPS growth rate of 46% vs its peers’ average of 23%, 
  2. superior FY16 ROE of about 22% vs its peers’ 8%, 
  3. strategic partnership with one of the largest content buyers in Singapore, 
  4. a lower risk profile vs some of its peers who invest directly in productions. 

OUR VIEW 

• A mutually beneficial partnership. 

• We view the strategic partnership as beneficial to both parties as the cost of purchasing content continues to rise and advertising revenue continues to fall. 

• Local collaborations. 

• We believe mm2’s three-year agreement with StarHub will eventually allow it to become the go-to content provider for StarHub. This will contribute to mm2’s top-line while lowering the content cost for StarHub. 
• We conservatively expect the top-line contribution from the collaboration to be around S$4m per year and the gross margins from the project to be around 12% which is lower than the overall group margin. 
• The collaboration and MOU further reaffirms our confidence and belief in the quality of the company.

VALUATION 

• We maintain a BUY on mm2 after its recent strong price appreciation on the back of a slew of positive news. 
• We adjust our earnings forecasts to account for the UnUsUaL Group acquisition, earnings contribution from the StarHub partnership and the enlarged share base following the new share placement to StarHub. 
• Our valuation methodology has been adjusted slightly and we now apply a 10% premium to our sector PE of 20.3x FY17F earnings. 
• Our new target price of S$0.64 is pegged to a premium-adjusted peer average PE of 22.3x. 

Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-24

UOB Kay Hian Analyst Report BUY Maintain BUY 0.64 Up 0.505