Mm2 Asia - DBS Research 2017-07-19: Setting The Stage For Sustainable Growth

Mm2 Asia - DBS Vickers 2017-07-19: Setting The Stage For Sustainable Growth MM2 ASIA LTD. 1B0.SI

Mm2 Asia - Setting The Stage For Sustainable Growth

  • Acquiring 50% stake in Golden Village Singapore for S$184.3m, implying valuation of 10.5x EBITDA.
  • Better bargaining power; complements Malaysia cinema operations.
  • Stable cash business; source of recurring income and potential for cost savings.
  • Adjust earnings to account for acquisition and expect margin improvement; TP raised to S$0.75.

Raised target price to S$0.75 after accounting for Golden Village acquisition and expected margin improvement. 

  • mm2 will be the number one cinema operator in Singapore, upon completion of the proposed acquisition of Golden Village cinema chain, expected to be completed by end-July 2017. This acquisition will complement its current cinema operations in Malaysia, and further cement mm2's status as the leader in the media/entertainment industry. 
  • With a much bigger and stronger scale, mm2 can now enjoy the synergistic benefits from the entire value chain.

Growth supported by core business and UnUsUal; cinemas to build recurring income. 

  • We continue to project mm2's EPS to grow at a CAGR of 75% from FY16-FY19, underpinned by growth in productions, expansion into the China market, and contribution from UnUsUal
  • The cinema arm, on the other hand, helps the group build a recurring income base.

Where We Differ: Higher valuation peg vs consensus. 

  • We value the production business at 28x PE, in line with peers listed in Asia, vs consensus’ valuation of about 25x. 
  • For UnUsUal, we value it at current valuation. For the cinema segment, we use 21x PE valuation peg.

Potential Catalyst: Reaping fruits of success in North Asia. 

  • We expect North Asia to contribute > 70% of production revenue from FY18F, up from 36% in FY16 and 56% in FY17. 
  • Upside to earnings could come from more projects, especially in China where the market is bigger and budgets are much higher.

WHAT’S NEW: Building a platform for sustainable growth 

Acquiring 50% stake in Golden Village Singapore. 

  • mm2 Asia is proposing to acquire a 50% stake in Golden Village's (GV) cinema business in Singapore for about S$184.3m or 10.5x the aggregate earnings before interest, taxes, depreciation and amortisation (EBITDA) for the period ended 31 December 2016, slightly higher than the 8-9x EBITDA paid for the cinemas in Malaysia.

Funding secured. 

  • The proposed acquisition, expected to be completed by end July 2017, will be funded by a combination of debts, as well as proceeds from the recent fund-raising exercises. 
  • So far, mm2 has raised about S$65m via placement of new shares at S$0.57 per share; with S$15m from StarHub and another S$50m from other investors. 
  • mm2 also proposed to issue up to S$93.04m convertible debt at 2% interest per annum to fund this acquisition. The debt can be converted into shares in a planned IPO of the cinema business within two to three years. The balance will be financed via bank borrowings.

Seller of GV cinema. 

  • The seller of the GV cinema, Village Cinema Australia, is a wholly-owned subsidiary of Village Roadshow Limited, a company listed on the Australian Securities Exchange. 
  • Based on the latest publicly available financial statements for the financial year ended 31 December 2015, the GV cinema business reported a net profit of S$25.1m. The aggregate net tangible asset (NTA) value was S$33.9m. 
  • Village Roadshow has been reviewing its assets for possible sale in a bid to reduce its soaring debt levels.

Rationale for acquisition of cinema 

1) Strengthening downstream value chain of film distribution; cost savings for the group 

  • The proposed acquisition of the GV cinema would further strengthen mm2’s presence in the downstream value chain of film distribution. It would also enable mm2 to have better bargaining power, and complement its Malaysian cinema operations. 
  • As the market leader, mm2 would now have better bargaining power in terms of securing distribution titles and screening rights. This will also complement its current cinema operations in Malaysia. 
  • With a stronger footage in the entire value chain, from creation of content to the distribution of content, mm2 would be able to enjoy synergistic effect from the entire value chain.

2) Stable and cash business. 

  • Cinema operation is a relatively stable business with a 10-year CAGR of 3.5% for cinema attendances and box office receipts on an 8-year basis.
  • For Malaysia cinemas, the growth rate is higher, at 10% and 14.6% for attendances and box office receipts respectively. Cash is collected upfront, and about 50% of the box office receipt goes to the movie producer.

3) Source of recurring income. 

  • Cinema is a long-term investment, with payback period of about four to eight years, depending on location, while depreciation is usually on a 10-year basis. Cinema operation is usually operated on a 24/7 basis, with no wastage of resources, unlike the production of movies, which could be affected by weather conditions. 
  • Furthermore, going forward, cinemas can also be a crowd puller for malls, to counter the proliferation of online shopping.

To be Number One in both Singapore and Malaysia 

  • Upon completion of the GV acquisition, mm2 will be the number one player in the Singapore cinema scene. In Malaysia, mm2 is ranked fourth.

Golden Village is top cinema in Singapore with 39% market share. 

  • GV is Singapore's leading cinema exhibitor with 11 multiplexes housing 92 screens with locations in various parts of Singapore. Total capacity is 1,390 seats, consisting of eight auditoriums and three Gold Class cinemas. 
  • Other cinema operators in Singapore include Shaw, Cathay, Filmgarde and WE cinema by Eng Wah. Shaw has about eight cinemas, Cathay seven, Filmgarde two and WE, one. In terms of number of screens and seating capacity, GV has a market share of about 39%.
  • We expect another two to three GV cinemas to come on stream within the next two to three years, which will further cement mm2’s top position in the industry.

Ranked fourth in Malaysia. 

  • The top three players in Malaysia – MBO Cinemas, with about 34 locations, Golden Screen Cinema (GSC) (33 locations) and TGV Cinemas (32 locations) account for about two-thirds of the market share. 
  • mm2 will be the number one player in Malaysia if it can acquire either one of the chains. GSC was reportedly put up for sale by its owner the Robert Kuok-controlled PPB Group, with asking price of about US$500m.

Earnings and Recommendation 

Adjust earnings to account for GV acquisition and expected margin improvement. 

  • We have revised our forecasts to take into account the acquisition of the Golden Village cinema chain in Singapore, and also assuming a slight improvement in gross margins for the production business to 45% from 40% previously, which is still below the 48% gross margins achieved in FY17. 
  • We have assumed a 65:35 debt-to-equity financing for the GV acquisition, at interest cost of 2% for the convertible debt and 5% for bank borrowings. Net gearing for FY18F is thus increased to 0.6x, from net cash in FY17.
  • Overall, we have raised FY18F earnings by 31%, mainly attributed to the 8-month contribution for GV cinema while FY19F earnings were lifted by 55%, after accounting for the full contribution from Lotus and GV cinemas. 
  • With a much bigger and stronger group as a whole, our target price based on sum-of-parts is now S$0.75 based on the enlarged share capital, up from S$0.70 previously. Maintain BUY. 
  • The in-principle approval by the SGX for the transfer of listing of mm2 from the Catalist Board to the Mainboard should help the group to build up its investor base.

Key Risks to Our View

  • 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 | 2017-07-19
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.75 Up 0.700