mm2 Asia - CIMB Research 2016-05-25: A strong content aggregator

mm2 Asia - CIMB Research 2016-05-25: A strong content aggregator MM2 ASIA LTD 43D.SI 

mm2 Asia - A strong content aggregator

  • mm2’s FY3/16 core net profit of S$8.2m beat our full-year estimate at 118%.
  • Meaningful contributions from newly-acquired Cathay cinemas and Vividthree production in FY16, with more to come in FY17-18.
  • Content production is still the main driver, with increasing North Asia productions.
  • We are seeing synergies across the various acquisitions, starting with Vividthree which offers post-production services (3D graphics effects etc.).
  • Reiterate Add with a higher TP of S$0.73, based on 22x CY17 P/E (peers’ average)

Boosted by both organic and inorganic growth

  • mm2 reported 58% yoy growth in topline, of which movie production and distribution generated S$25.3m and S$6m sales respectively. 
  • Recent acquisitions of Vividthree (51% stake) and Cathay cinemas also contributed S$3.8m and S$4.9m respectively, benefitting the bottomline as well due to their higher-margin businesses. 
  • We saw an uptick in FY16 overall gross margin to 48% vs. FY15’s 39%.

FY16 net profit rose 75% yoy despite higher operating costs

  • While FY16 revenue of S$38.3m was broadly in line with our full-year forecast at 96%, core net profit was above at 118% due to better revenue mix with higher margins. 
  • Operating expenses rose 177% yoy, partly due to S$3.6m inherited from newly-acquired operations, as well as S$1.3m of professional fees arising from such M&A activities. 
  • One-off distortion of effective tax rate helped offset the higher costs, resulting in FY16 net profit growth of 75% yoy.

Film/content production remains the key driver

  • With the combined financial support of up to S$30m from Starhub and Singapore’s MDA for more local productions, we believe content creation remains the key driver for mm2. 
  • Apart from Vividthree (3D animation and graphics firm) which contributed S$3.6m of post-production revenue with gross margins of close to 70%, we expect to see further realisation of synergies across the various acquisitions. 
  • North Asia productions, which accounted for c.30% of FY16 revenue (FY15:20%), are expected to increase from FY17.

Solidifying its cinema presence

  • mm2 has successfully completed the rebranding of 2 Cathay cinemas in Malaysia, which saw a 5 months’ contribution in FY16. We expect the earnings from three Mega cinemas in Malaysia and 51% stake in Unusual Entertainment group to come online in 1-2 months’ time, giving another boost to our FY17F EPS growth of 52%. We think there is potential for mm2 to enlarge its cinema presence in Malaysia, or expand into Singapore.

Maintain Add with higher target price of S$0.73

  • As we revise our assumptions for FY17-18 production budget, our EPS estimates increase by 0.5-5.0%. Our target price thus inches up slightly to S$0.73, still pegged to peers’ average of 22x P/E multiple
  • Potential catalysts include greater penetration into China and more earnings-accretive acquisitions, while key risk to our Add call is any unexpected production delay.

NGOH Yi Sin CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-25
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.73 Up 0.70