mm2 Asia - Maybank Kim Eng 2016-06-29: Now Showing ~ The Upstart

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MM2 ASIA LTD 43D.SI 

mm2 Asia (MM2 SP) - Now Showing: The Upstart

Budding media entertainment company

• mm2 Asia is a service provider in the USD14.1b Asian film industry. Its expertise lies in the production and distribution of films in Singapore, and Malaysia.
• Group has been looking to establish an expanded foothold in the Greater China region through strategic working relationships in China, Hong Kong, and Taiwan. At the same time, management is undertaking M&As to transform the company into a more holistic media entertainment group.

with non-speculative revenue streams...

• Production accounted for 57% of FY16 revenue with producer fees forming the bulk of the business arm’s contributions. These fees are almost guaranteed to be received once film production goes ahead. Hence, potential losses stemming from poor box office receipts are substantially, if not, completely mitigated. 
• Average producer fees per film amounts to about SGD1.5m with Chinese films generally offering higher fees. Management shared that it expects to produce about 20 films in FY17 (FY16: 14).

Filling a SGD17m funding gap

• With only SGD4.7m in cash reserves and SGD4.8m in unutilised Orientivity proceeds, mm2 will need to raise more funds to fuel its ambitions and plug a ~SGD17m funding gap for its recent acquisitions.
• In light of its track record and current debt burden (8.2% of equity), still considered light by industry standards (11%), mm2 could seek funding through a combination of debt (higher interest costs), equity through private placements (dilution) as well as a possible UnUsUaL stake sale.

Current valuations foretell growth prospects

• Based on consensus estimates, mm2 is trading at a 9% discount to its peers despite its growth profile which is backed by an ROE of 30%. mm2 is also one of a handful of profitable publicly-listed film producers and should see earnings scale up quickly if the company is able to establish a foothold in new markets.
• The street has 1 Buy and 1 Hold call on the counter with consensus TP of SGD0.74.

Investment thesis

Lights, camera and action

• mm2 is a local film producer and distributor. These two core business segments account for more than 72% of FY3/16 revenue. Production revenue (57% of revenue) is mainly derived from producer fees and bonuses*. In FY16, it produced 14 films (FY15: 9 films), which underpinned the segment’s revenue of SGD22m (+45%).
• Distributorship formed 16% of revenue, mainly from the nine films mm2 distributed in FY16. Owing to the nature of the business, contributions can be quite volatile as evidenced by the spike in FY15’s performance to SGD7.5m due to a box office hit, Ah Boys To Men 3.
• The third key revenue component is sponsorship commissions (6%), which are generally earned when mm2 secures corporate sponsors for specific films. Historically, mm2 receives ~15% commission of the total sponsorship amount. Sponsorship revenue doubled to SGD2.1m in FY16 (FY15: SGD1.1m) due largely to sponsorship dollars received for a film-event held in China.
• The three segments have performed well over the past few years, supporting revenue CAGR of 32.4% over FY13 to FY16. In FY16, revenue growth came primarily through inorganic means (60%), with its core contributing to remaining growth. Beyond FY16, management has articulated a growth plan that entails expanding into the cinema and events businesses.

Key growth strategies

• mm2’s growth strategy is based on its strategic goal to be a holistic content company with capabilities in production, distribution, and exhibition across the Asia Pacific.
  1. Expanding in the Greater China region and into the US
     Having established its film production and distribution network in Singapore and Malaysia, mm2 is currently expanding its footprint in the Greater China region with an eye looking towards the US market as well.
     The two regions generally boast larger markets where movie-goers are also becoming increasingly more discerning in what content they consume. This naturally dictates a larger production budget, which could translate to higher production fees. Additionally, the US film industry allows for larger producer bonuses, which are about 2.5x more than that in Asia.
  2. Building blocks for a holistic entertainment group
     In a short span of only five months, its two newly acquired Malaysian cineplexes generated maiden revenue contributions of SGD4.9m, accounting for about 13% of its total FY16 revenue mix. With the addition of another three cinemas in Malaysia this year, this business arm is expected to be a key growth driver in the quarters to come.
  3. Synergies from proposed stake in UnUsUaL
     Another growth avenue could come from its 51% stake acquisition of the UnUsUaL group of companies. The acquisition deal (of SGD26m) was valued at a PE of 10.2x and is based on UnUsUaL attaining net profit targets of SGD5m for each of the next three years. Management believes that synergies can be reaped, particularly with the concert organiser’s ability to network with well-known global/regional artistes such as Michael Buble, A-mei, and Andy Lau.

Risks

• Earnings risks may stem from production delays and cost overruns. In such cases, mm2 will have to make up for the shortfall. However, thus far, its core business has not yet been materially affected by such delays and overruns.
• Another risk is mm2’s transition from a previously asset light model to a more asset heavy model as it expands downstream towards the end consumer through cinema operations. This requires relatively heavy capex and additional expertise. Currently, we note that mm2 has a ~SGD17m funding gap that has risen from its recent acquisitions. mm2 will likely seek funds through debt (higher interest costs) and equity (dilution) markets.
• The other main risk arises from an inability to grow its production pipeline either due to: 
  1. a dearth of good scripts/content 
  2. loss of support from investors (both private and public), and sponsors to invest in the production budget 
  3. inability to secure third parties (directors, production crews, etc) to make the film.

Not Rated. Target Price N/A.

Simeon Ang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-29

Maybank Kim Eng SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998