mm2 Asia - CIMB Research 2017-04-06: A head full of dreams

MM2 ASIA LTD. 1B0.SI

mm2 Asia - A head full of dreams

51%-owned Unusual Productions is Singapore’s leading concert producer and promoter, aiming to expand regionally and develop own IPs in the form of musicals.
We expect Unusual to secure more artiste tours with the IPO proceeds, boosting its earnings contribution to mm2 from FY17F’s S$1.8m to S$4.9m in FY19F.
Upcoming spin-off results in stake dilution to 41.9% for mm2, but mitigated by stronger earnings from Unusual. We raise our FY18-19F EPS by 6-14%.

Robust project pipeline includes “The Voice” and 4 th instalment of “Ah Boys to Men”.
Maintain Add with higher TP of S$0.60 as we switch to SOP-based valuation.

Company profile Established in 1997, UnUsUaL Limited (“Unusual”) is a production and promotion service provider for large-scale live events and concerts, which works closely with performing artistes, their agents and managers to showcase their concerts and/or events in Singapore and the region (namely Malaysia and Hong Kong).
It has a track record of organising over 150 concerts and 200 events till date. Some of the notable acts which Unusual was involved in include Jacky Cheung’s 2005 “Snow. Wolf.” musical, Air Supply Asia Tour 2012, and Amei’s AMIT UTOPIA World Tour in 2016.
As a producer, Unusual assists in conceptualising and developing creative input, while providing consultancy services, design and technical solutions for the production set-up. The role of promoter, on the other hand, involves coordination with artistes and their management companies on venue suitability, ticketing matters and marketing.
Apart from the core business of production and promotion, Unusual also trades in rights to concerts and/or events, offers equipment rental and co-shares the rental of a venue location in Singapore (The Max Pavilion @ Singapore Expo).

Concert/event production and promotion providers like Unusual compete on various factors, including creativity, cost, timeliness and positive customer feedback. Performing artistes typically conduct tours once in 2-3 years within the region, and the company follows up closely with these repeat customers.
Performing artistes and their agencies often look for design capability, technical expertise and financial credibility in choosing their preferred partners to work with, while end consumers may prefer concert promoters that have an established track record and positive customer feedback in handling large-scale events. These factors create moderately high barriers to entry in the production and promotion industry.
Some of the notable peers in the region include Mediacorp’s Vizpro (20% owned by SPH), Live Nation Entertainment (LYV US, Not rated), and unlisted LAMC Productions.
Unusual also competes with other venue operators like Marina Bay Sands (MBS) and Resorts World Sentosa (RWS) which bring in their own shows and events, to attract casino high rollers, hotel guests and tourists.

Apart from the end consumers who attend concerts, Unusual’s major customers include ticketing agents like Sistic.com and SportsHub (ticketing functions for Singapore Indoor Stadium and National Stadium), as well as corporate customers who engage their production services (for example, Singapore GP for Formula One Grand Prix, Singapore Sports Council, and Singapore Chinese Orchestra Company). These major customers are non-recurring and do not pose any concentration risk to the company.

According to its IPO prospectus, the majority of organic growth for Unusual could come from its regional expansion into other geographical markets.
Management sees potential in China, particularly second-tier cities, owing to the larger-scale concerts, abundant availability of performance venues and rising demand from the domestic middle-class population.
We also expect a portion of its IPO proceeds to go towards funding potential M&As and other investments. Acquisition of a ticketing platform (similar to Ticketmaster for Live Nation) or a venue management company to extend its value chain of service offerings, as well as licensing rights for musical broadways, could be exciting and bode well for the company, in our view.

We note that Unusual will be changing its current Dec financial year-end to align with mm2’s Mar financial year-end.
Based on the financials reported in its IPO prospectus, the company was in a net cash position as at end Sep-16, and has recorded positive operating cashflow since FY13, with annual capex spending of S$1m-2m.
The S$0.20 IPO price translates into FY15 P/E of 26.8x (based on post-placement share capital of around 643.2m shares) for Unusual, which compares favourably against the 10.2x forward P/E that mm2 previously paid for its 51% stake in Feb 16.

While the 96.99m new placement shares (~15% free float) would reduce mm2’s stake in Unusual from 51.0% to 41.9%, we expect Unusual’s stronger growth to more than compensate the earnings gap arising from the dilution.
Unusual organises 12-15 shows on average per year, and typically has one year of project visibility. Its business model is scalable beyond the 12-15 shows for the seemingly saturated Singapore market, as the company aims to penetrate into 2nd tier Chinese cities and regional countries like Thailand and HK.
With approximately S$17.4m of net proceeds to be raised, c.S$10m would be utilised to secure more popular artistes for promotion and production projects (which require upfront payments), S$4m for strategic investments and the remaining S$3.4m for general working capital.

We switch to the sum-of-parts (SOP) methodology to better value the various business segments of mm2 (vs. 22x CY18 P/E previously) using different P/E multiples.
Our SOP-based target price rises to S$0.60 on higher earnings contribution from its 41.9% stake in Unusual Production.
Maintain Add.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-04-06

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.60 Up 0.520