mm2 Asia - CIMB Research 2016-08-24: Beginning of next act

MM2 ASIA LTD. 43D.SI

mm2 Asia - Beginning of next act

mm2 sees potential opportunities in a changing media landscape in Singapore, left behind by incumbent broadcasting stations and channels (e.g. Mediacorp).
FY17-19F earnings growth of 15-85% driven mainly by growing production budget and acquisitions as the company strengthens its foothold in North Asia.

Near-term catalysts: synergistic M&As, transfer of listing status to Mainboard.
We upgrade mm2 from Hold to Add with higher target price of $0.84, ahead of potential catalysts.

We recently met with management for business updates, during which they also shared their plans and strategies for the near-term, particularly on
1. capitalizing on the changing media landscape in Singapore,
2. organic growth via deeper penetration into North Asia and expansion of its existing product offerings to include format shows,
3. acquisitions of more cinemas in the region, and
4. more robust production pipeline.

In Apr 16, Mediacorp announced that it will together with its major shareholder Temasek Holdings, review its operations to better position itself for future opportunities, while focusing on “content, capabilities and channels” in an age of competing online content sources.
About 60% of local Public Service Broadcast (PSB) programmes are produced in-house by Mediacorp. This ratio is likely to come down as the national broadcaster outsources more of its production to independent companies like mm2.

Apart from an increasing number of movie productions in North Asia, mm2 has also broadened its offerings to TV dramas (Rmb70m collaboration), and potentially format show production. Local adaptations of format shows such as “The Voice of China” and “Dad, where are we going?” have proven to be hits in recent years.
Management targets to increase the contribution from North Asia productions (22% of FY16 revenue) to more than 70% over the next three years, given the bigger market and production budget.

mm2 acquired five cinemas in Malaysia (2 Cathay, 3 Mega cineplexes) in 2015, which have since been rebranded as mmCineplexes and are mostly situated in prime locations with good footfall. The cinema business offers recurring income and an extension of media network with international production studios for future partnership prospects, which we view as complementary to mm2’s existing core business of content production.
Management plans to expand its theatre footprint in both Malaysia and Singapore.

We update our model to reflect
1. higher production budget,
2. the completed acquisition of Unusual Group (51% stake) on 11 Aug, and
3. higher capex needs.
Our FY17-19F EPS estimates thus increase by 10-20%.
We upgrade mm2 from Hold to Add with a higher target price of S$0.84 (pegged to 22x CY17 P/E, peers’ average).
Potential catalysts include the successful transfer of listing status from Catalist to Mainboard, and earnings-accretive M&A.
Key downside risk is unexpected production delay.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-08-24

CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 0.84 Up 0.730