Mm2 Asia - CIMB Research 2017-06-14: A Gold Class Acquisition

Mm2 Asia - CIMB Research 2017-06-14: A Gold Class Acquisition MM2 ASIA LTD. 1B0.SI

Mm2 Asia - A Gold Class Acquisition

  • mm2 entered into conditional S&P agreement for 50% stake of Singapore-based GV cinema business, for purchase consideration of S$184.3m.
  • As a cinema operator with 44% market share in Singapore, GV is a prized asset that comes with quality facilities, prime locations and superior profitability.
  • At 10.5x FY16 EBITDA and 14.7x FY16 P/E, S$184.3m seems pricey relative to previous cinema acquisitions in Malaysia.
  • Stake acquisition to be funded by both debt and equity, which would raise EPS and net gearing, depending on the final financing structure.
  • Our SOP-based target price rises to S$0.72 to reflect the higher EPS; maintain Add.

Acquiring 50% stake in Golden Village Singapore cinemas 

  • On 13 June 2017, mm2 announced the signing of a conditional share sale and purchase (S&P) agreement with Village Cinemas Australia, a subsidiary of Village Roadshow Limited (VRL AU, Not Rated), for a 50% stake in the Golden Village (GV) cinema business in Singapore. 
  • This proposed acquisition not only builds up a recurring income stream for the company and complements its current cinema operations, but also extends its presence beyond Malaysia.

Becoming a market leader in Singapore cinema exhibition 

  • Established since 1992, GV is Singapore’s leading cinema exhibitor with 44% market share (based on box office receipts), followed by Cathay Cineplexes and Shaw Theatres.
  • It currently owns 11 cinemas and 91 screens, and plans to open three more cinemas in SingPost, Bedok and Funan respectively, over the next three years. 
  • Apart from opening new cinema sites, we expect GV to sustain its steady earnings growth, underpinned by a strong film pipeline and improved movie experience.

Better quality assets comes with slight premium 

  • The 50% stake comes with a price tag of S$184.3m, which implies 10.5x FY16 EBITDA and 14.7x FY16 P/E. GV's quality cinema assets, coupled with strategic locations and superior profitability, could explain the higher valuation (vs. 9.8x EBITDA for mm2's previous purchase of 13 Lotus Fivestar cinemas). 
  • The purchase consideration also translates to S$4m (RM12.5m) per screen, significantly higher than the cost per screen for Cathay (RM1.3m), Mega (RM1.7m) and Lotus (RM1.1m).

Sizeable deal to be partially financed by debt and equity 

  • We expect the deal to be financed by a mix of debt and equity, and estimate an end- 3Q18 completion date. In our scenario analysis, we explore various funding structures that the company might adopt, and believe a 55/45 debt-to-equity is likely. 
  • Assuming a 2% interest cost and new share issuance at the last traded mm2 share price of S$0.62, this could raise its FY18 EPS by 18.1% and hike its net gearing ratio to 63.0%. 
  • With a seemingly stretched balance sheet, funding future acquisitions may become a concern, in our view.

TP rises on higher EPS; Add rating intact 

  • As we factor in potential earnings contribution from the GV Singapore business (as a line item under share of revenue from joint venture), our FY18-20 EPS estimates increase by 18.1-18.7%, offsetting additional financing costs and new share dilution. 
  • Our SOP-based target price hence rises to S$0.72. We keep our Add rating. 
  • Earnings-accretive M&As and stronger earnings delivery are potential catalysts, while unexpected production delay, cost overruns and unfavourable deal financing could pose downside risks to our Add call.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-06-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.72 Up 0.650