mm2 Asia - CIMB Research 2016-11-08: Scoring a hat trick in cinemas

mm2 Asia - CIMB Research 2016-11-08: Scoring a hat trick in cinemas MM2 ASIA LTD. 1B0.SI

mm2 Asia - Scoring a hat trick in cinemas

  • mm2 proposed acquisition of 13 Lotus Fivestar cinemas in Malaysia, expanding its market share to top four in Malaysia.
  • Deal comes with 2-year EBITDA target of S$3.3m and option for more cinema purchases and collaboration.
  • Purchase price cheaper than previous acquisitions of Mega and Cathay.
  • Earnings-accretive acquisition raises our FY18-19F EPS by 4-7%.
  • Deal an overall positive given the greater synergies and diversification. Maintain Add, with higher target price of S$0.52 (based on 22x CY18F P/E, peer average).

Becoming the 4th largest cinema operator in Malaysia 

  • mm2 announced a proposed acquisition of 13 theatres in Malaysia from movie chain Lotus Fivestar Cinemas, which also owns 10 other outlets in Malaysia. These 13 cinemas are relatively new with operating history of 1-7 years and collectively have a total of 90 screens and 15,818 seats. 
  • Combining cinema assets from earlier purchases of Cathay and Mega cineplexes, mm2 now ranks the 4th largest cinema operator in Malaysia, with a total of 133 cinema screens.

Minimum EBITDA of S$3.3m for the next two years 

  • The proposed deal comes at a price of RM98m to be funded by a mix of cash and debt, and also carries 
    1. an annual EBITDA target of RM10m (S$3.3m) over a 2-year period, 
    2. an option to purchase two more cinemas at a lower 8x EBITDA, and 
    3. possible partnership with Lotus Fivestar to explore new sites in the future. 
  • We are overall positive on the deal as it allows mm2 to benefit from economies of scale. 
  • Management does not rule out further cinema acquisition, even beyond Malaysia. 

Cheaper than Mega and Cathay 

  • The acquisition cost of RM98m translates to RM1.1m per screen. This compares favourably with the cost per screen of RM1.3m for Cathay and RM1.7m for Mega cineplexes. It is also significantly cheaper than the planned sale of Golden Screen Cinemas at US$500m, which values the market leader at RM6.8m/screen. 
  • The offer for the 13 Lotus Fivestar cinema locations is also fairly priced at 9.8x EBITDA, below the industry average of 15-16x EV/EBITDA.

FY18-19 EPS estimates increase by 4-7% 

  • We expect the deal to conclude by end-FY17, and raise our FY18-19F EPS by 4-7% to account for stronger cinema earnings contribution. 
  • We also adjust our FY17-19 capex assumptions higher to include the acquisition of a 15% stake in Rings.TV (an interactive broadcasting technology platform for live streaming of concerts, performances etc.) at S$2.25m. 
  • Production for Singapore/Malaysia's version of ‘The Voice’ is scheduled to air in 2017 and has been factored into our FY18F film budget.

TP increases to S$0.52 on higher EPS and roll-over 

  • As we raise our EPS forecasts and roll our valuation over to CY18F, our target price rises to S$0.52, still pegged to its peer average of 22x P/E. We maintain our Add call.
  • The downside risk to our Add rating is unexpected production delay or budget overrun.
  • Potential re-rating catalysts include stronger traction into North Asia film production and earnings-accretive M&As.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2016-11-08
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.52 Up 0.42