mm2 Asia - CIMB Research 2017-08-15: 1QFY18 Casting Spotlight Back On Core Production

MM2 ASIA LTD. 1B0.SI

Mm2 Asia - 1QFY18 Casting Spotlight Back On Core Production

mm2 Asia's 1Q18 core PATMI of S$6.6m (+33.3% yoy) met our/consensus expectations.
Doubling production pipeline, with focus on North Asia and IP rights development, to drive FY18-20F topline and earnings growth.
Expect stronger contribution from Unusual (more upcoming artiste tours) and cinema operations (upon completion of Lotus Fivestar cinema acquisition).

S$157m war chest to potentially add S$11m-16m to earnings in FY19-20F, posing upside risk to TP.
At current price level, we think mm2 now looks attractive. Upgrade from Hold to Add.

Mm2 reported 1QFY3/18 core PATMI of S$6.6m, up 33.3% yoy; we deem this in line with our/consensus expectations at 27% of FY17F.
While topline grew 83.6% to S$24.6m and only formed 17% of our full-year numbers, mm2’s 1Q18 profitability was boosted by better gross margin of 62.4% (1Q17: 75.0%, FY18F: 46.5%); we also expect stronger production revenue and Unusual contribution from further rollout of projects.
Gross margins could vary on a quarterly basis, depending on the phase and type of production.

Core production is still the main growth driver for mm2, expanding 44.8% yoy to S$13.9m and representing 57% of its 1Q18 revenue (1Q17: 71%). We continue to see a robust pipeline of at least 38 TV/film productions over the next 12-18 months (FY17: c.19), for both Singapore/ Malaysia and North Asia markets.
Beyond the role of a co-producer or consultant, mm2 also sees opportunities in developing strong IP rights and short content film, to better monetise content and spur advertising dollar.

In 1Q18, mm2’s 42%-owned Unusual recorded S$6.2m revenue and contributed S$0.6m to its bottomline. Together with events such as Singapore’s NDP and SEA Games, the previously announced line-up of concerts by Foo Fighters, GEM and Angela Chang in Singapore and overseas should contribute more meaningfully in the coming months.
Cinema sales grew S$1.3m with the addition of Mega Cinemas, and should see further growth upon the completion of the Lotus Fivestar acquisition, expected by Sep 17.

Mm2 recently raised S$157m proceeds via a combination of new shares and convertible debt securities, intended for acquisitions and investment in productions. Taking reference from its M&A track record and assuming mm2 pays P/E multiple of 10-15x, this could generate additional earnings of S$10.5m-15.7m for the company, potentially raising its SOP target price to an estimated range of S$0.76-0.92.
We also think any favourable development on the discussion of the GV Singapore deal could be positive for the stock.

We retain our FY18-20F assumptions, and upgrade from Hold to Add with an unchanged SOP-based target price of S$0.58.
mm2’s share price has taken a beating since the lapsed GV Singapore deal, but we think the stock is oversold and now presents a more attractive entry point. It currently trades at 19.6x FY18 P/E (ex-cash), with catalysts ahead from earnings outperformance and accretive M&As. Stronger execution record could ease stock overhang.
Key risks are unexpected production delay or cost overrun.

Since mm2 announced a 50% stake acquisition of GV Singapore, its share price has undergone a turbulent ride, falling 29% to S$0.455 after rising to a high of S$0.645, even lower than its share price of S$0.605 before the company entered into discussion with Village Roadshow Australia.
While we previously downgraded the stock from Add to Hold following our EPS and TP cuts (from S$0.72 to current S$0.58, see report: mm2 Asia - Assuming ‘orange Sky’ Scenario), we now think the selling is overdone, especially with potential catalysts from stronger-than-expected earnings and other synergistic M&As.
The stock currently trades at 19.6x FY18 P/E and 15.7x FY19 P/E on an ex-cash basis, and we see this as an attractive entry level; upgrade from Hold to Add with an unchanged SOP-based target price of S$0.58.

With fresh funds totaling S$157m, comprising S$64m new share issuance (114m shares at S$0.57/shr) and S$93m convertible bonds, mm2 is well equipped to undertake any accretive M&As to realise its vision of a leading media company and cinema operator.
Based on its prior M&A track record, we think the company is likely to pay transaction P/E multiples of 10-15x, potentially leading to an additional S$10.5m-15.7m of earnings (in FY19-20F), and higher estimated target price range of S$0.76-0.92, assuming other forecasts remain unchanged.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-08-15

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