mm2 Asia - DBS Research 2017-04-13: An UnUsUaL boost

MM2 ASIA LTD. 1B0.SI

mm2 Asia - An UnUsUaL boost

Listing status allows UnUsUaL to tap on equity market for expansion.
Core earnings for FY17F-FY19F revised up by 5- 14% to account for higher contribution from core business and UnUsUaL.
Maintain BUY with a higher TP of S$0.63 based on SOTP valuation.

UnUsUaL shares were listed on the Catalist board of SGX on 10 April 2017. Its share price registered a whopping 117% gain on the first day to close at S$0.435, vs its IPO price of S$0.20.
mm2 Asia bought a 51% stake in UnUsUaL back in February 2016 for S$26m. Based on UnUsUaL's current share price, mm2 has already made a paper gain of more than fourfold!

UnUsUaL, which specialises predominantly in the production and promotion of large-scale live events and concerts, sets itself apart from other competitors in the industry by providing comprehensive solutions encompassing technical expertise and creative input, and also to mitigate single business risk.
With a listing status now, UnUsUaL can tap on the equity market for expansion, which will help to boost mm2’s bottom line.
Strategies for UnUsUaL include:
1. Expanding operations regionally; targeting North Asia with bigger audience base and leveraging on mm2’s presence
  One of UnUsUaL’s strategy is to diversify its revenue base geographically. One of the regions where UnUsUal is targeting is North Asia, which has a much bigger audience base than Singapore, and where mm2 already has a presence in. This will allow UnUsUaL to leverage on mm2’s network of contacts in the media and entertainment industry as it looks to expand into these territories.
2. Improving margins by extending events to more locations
  Improving bottom line is another key focus. By securing more concerts and/or events within the region, the group will be able to have a better bargaining advantage with its suppliers, especially venue owners and artiste managers. Margins can be improved with more venues for the same production as the props can usually be recycled for different venues. The concept and technical expertise required for the same production are also similar.

We previously forecast UnUsUaL to contribute about 17% of FY Mar18F revenue and 21% of gross profit. With better clarity on UnUsUaL now, we expect contribution from this unit to account for 25% of total revenue and 24% of gross profit.
Gross margin for UnUsUaL is expected to improve to 42%, from 37% previously as UnUsUaL’s operation expands regionally, and the same event/concert can be extended to more locations.

Though post listing of UnUsUaL, mm2’s stake is diluted to 41.91% from 51% previously, it is compensated by a now higher value for UnUsUaL, based on its current market cap.

The core business segment of production and distribution is progressing well. mm2 has already completed about 18 production titles for FY Mar17. The group has a healthy pipeline of projects for the next 18 months, from April 2017 to September 2018.

mm2 had made several acquisitions post listing on SGX in December 2014, to maintain its competitive advantage. The strong debut for UnUsUaL is a strong endorsement of mm2’s strategy.
For the core business, other notable acquisitions include Vividthree, a 3D animation services company, RINGS.TV, a leading interactive live streaming broadcast platform, other than UnUsUal.
On the cinema front, including the 13 cinemas from Lotus, mm2 has acquired a total of 18 cinemas in Malaysia, with a market share of about 14% in terms of number of screens, propelling the company to become a top four player in Malaysia.

We have revised the core earnings for mm2 up by 12% for FY Mar18F and 14% for FY Mar19F. For FY Mar17F, core earnings were tweaked up by 5%.
We have assumed higher contribution from the core business as the group continues to expand operations in North Asia. Projects in North Asia generally have bigger budgets and better margins.
For the UnUsUaL unit, we expect stronger growth post listing as the group is able to tap the equity market for expansion, and also margin improvements as the same event/concert can be extended to more locations as the group expands regionally.
We have lowered the contribution from the cinema segment as the payback for cinema investment tends to be longer.

We have switched the valuation methodology for mm2 to sum-of-parts valuation from the PE method, as contribution from the different business units will be more meaningful going forward.
- UnUsUaL will see a full-year contribution for FY Mar18F, vs a 9-month contribution for FY Mar17F, as completion of the UnUsUaL deal was only in July last year.
- For the cinema segment, the latest acquisition of 13 cinemas in Malaysia is expected to be completed in 2Q 2017.
- For the core business and post production (Vividthree) segment, we have used a valuation peg of 28x forward PE based on peers’ valuation.
- For the cinema segment, we value it at 21x PE, also in line with peers.

No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding.
Availability of good scripts. Lack of good scripts for production may lead to less support from stakeholders.

Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-04-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.63 Up 0.560