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
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William TNG CFA
CIMB Research
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http://research.itradecimb.com/
2017-06-14
CIMB Research
SGX Stock
Analyst Report
0.72
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0.650
