MM2 ASIA LTD - UOB Kay Hian 2016-05-26: FY16 Results In Line With Expectations, Expect More From North Asia

MM2 ASIA LTD 41C.SI

MM2 ASIA LTD (MM2 SP) - FY16 Results In Line With Expectations, Expect More From North Asia

The group has evolved substantially through a slew of shrewd acquisitions into a true entertainment business.
mm2 remains a compelling entertainment stock with an attractive forecasted 3-year EPS CAGR trajectory of 35% for FY16-19F.

mm2 recorded net profit after tax of S$8.2m for FY16, an increase of 60.8% compared with S$5.1m in FY15 due to a growth in the core business and contributions from newly-acquired subsidiaries and cinema business.
FY16 PATMI was largely within our expectations, coming at 98% of our full-year estimates.
Revenue was in line, accounting for 99% of our forecast.

General and administrative expenses increased 177% from S$3m in FY15 to S$8.3m in FY16 due to higher employee compensation costs as a result of an increase in senior management and employees resulting from the new acquisitions and cinema business.
Stripping out the acquisitions, FY16 general and administrative expenses rose 57% due to salary increases and an increase in professional fees.

mm2 expects North Asia to contribute a larger slice of revenue going forward. In addition, the group is constantly on the lookout for synergistic acquisitions to expand its footprint in the region.
Since our BUY initiation in Jan 16, the stock has been a stellar performer, rising 69% since initiation. We believe that its fundamentals remain intact and continue to apply a 10% premium to the sector peers’ average PE ratio.

mm2 announced the acquisition of five cinemas in Malaysia in 2015. FY17 is the year when we will see full-year contributions from the two newly-acquired Cathay cinemas. The acquisition of the three other cinemas from Mega Cinemas Management Sdn Bhd is expected to be completed in 2QFY17.
We do not rule out the possibility of mm2 acquiring additional cinemas in Singapore or Malaysia as the cinema business is a cash cow providing stable revenue with substantial synergies with the film-making business.

Management has indicated its willingness to expand deeper into North Asia. For FY16, North Asia contributed about 30% of production revenue. Given the higher movie budgets and larger audience, we expect that the ideal split would be more than 80% of revenue coming from North Asia and the balance from Southeast Asia.
Going by the number of strategic partnerships that the group has established, we expect more strategic tie-ups with companies in China, Hong Kong and Taiwan.

Raise our FY17 and FY18 net profit forecasts by 13% and 22% respectively as we factor in higher production revenue from North Asia and recent acquisitions.

Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-26

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