Mm2 Asia - DBS Research 2017-08-14: Growth Path On Track

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MM2 ASIA LTD. 1B0.SI

Mm2 Asia - Growth Path On Track

• mm2 Asia's 1Q18 net profit up 30% to S$6.4m, slightly above expectations.
• Gross margin impressive at 62.4% vs FY17’s 48%.
• Regional expansion on the cards for core production business, North Asia in particular.
• Reiterate BUY, TP lowered to S$0.60 to account for share dilution and removal of GV.

Healthy growth even without Golden Village cinema deal. 

• In view of the uncertainties surrounding the Golden Village (GV) deal, we have removed GV’s contribution from our earnings estimate. We are still expecting healthy EPS growth of 9% for FY18F and a much stronger 34% for FY19F, after factoring in the enlarged share capital from the recent equity fund raising exercise. 
• The strong set of 1Q18 results, with net profit up 30% to S$6.4m, further reinforces our positive view.

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 54% 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: Conclusion of the Golden Village deal; clarity of strategy for cinema. 

• The uncertainties surrounding the GV deal has caused the share price to drop by > 20%. A conclusion of the deal, and better clarity on the strategy for the cinema business should help to set the foundation for more sustainable growth ahead.

Valuation

• Reiterate BUY, TP lowered to S$0.60. 
• Our revised target price, based on sum-of-parts is now S$0.60, from S$0.75 previously with GV’s contribution, to account for share dilution and removal of GV. 
• Reiterate BUY.

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.

WHAT’S NEW

1Q18 result highlights: 1Q18 net profit up 30%, slightly above expectations 

• 1Q18 net profit up 30% to S$6.4m, slightly above expectations. Revenue for 1Q18 surged 83.1% to S$24.6m.
• About half of the gains were attributable to UnUsUal which the group acquired in August 2016, and the balance from its core business of production and distribution, and the cinema business. UnUsUal generated S$6.2m revenue (or 25.2% of total revenue). Core business posted a 44.8% increase in revenue to S$13.9%, making up 56.5% of total. Overall, 1Q18 net profit of S$6.4m is slightly above expectations, accounting for 29% of our full year earnings forecast excluding Golden Village’s cinema contribution.

Impressive gross margin of 62.4%, vs FY17’s 48%. 

• Gross margin of 62.4% is higher than FY17’s 48%. As margins could be volatile depending on the number of productions and concerts during the quarter, we are assuming a gross margin of 45% for FY18F.

Outlook & Recommendation 

Regional expansion for core production business, North Asia in particular. 

• mm2 will continue its focus on creating and building media and content for Asia, especially in North Asia.
• Revenue from North Asia contributed 48% of the core revenue from production in FY17, up from the 27% contribution in FY16. We continue to expect North Asia to contribute > 70% to total production revenue from FY18F onwards.
• Other than North Asia, mm2’s flagship local production, Ah Boys to Men sequels 4 and 5 have already started production and the target is to release sequel 4 by the end of this year, and sequel 5 during the 2018 Lunar New Year. Furthermore, mm2 has also started production of the Singapore/Malaysia version of The Voice, Talpa’s flagship talent format that will be aired in Singapore/Malaysia in October/November 2017.
• mm2 is also looking to expand to non-Chinese speaking markets like Korea, Japan, Thailand, India, and the US. mm2’s multi-market presence would provide for a strong network of contacts and opportunities for the group to leapfrog to its next level of growth.

Growing contribution from UnUsUal. 

• mm2’s 42% owned subsidiary, UsUsUal, reported a strong set of 1Q18 results.
• Net profit more than doubled y-o-y to S$1.54m. 
• With the increase in demand for concerts and events in the region, UnUsUal, with its dominant market position, is set to benefit from this rising trend.

4th largest cinema operator in Malaysia; early conclusion of GV deal a plus. 

• With the completion of the acquisition of the 18 Lotus cinemas in Malaysia by September 2017, mm2 will become the fourth largest cinema operator in Malaysia.
• In Singapore, the uncertainties surrounding the proposed acquisition of the Golden Village (GV) cinema would likely continue to cap share price performance in the near term.
• mm2 is currently in discussions with Village Cinemas Australia on possible options to proceed with the transaction. mm2 is committed to its cinema business, as a cinema growth strategy was already put in place since it made its first cinema acquisition back in 2015. 
• While the deal with Village Cinemas Australia would have fit well with mm2 Asia, the cinema growth strategy is not dependent on this one acquisition alone. mm2 is constantly pursuing other opportunities in parallel to discussions with Village Cinemas Australia. An early conclusion of the deal, whether on or off, would help to provide more clarity.

Removed GV from our earnings estimates; TP reduced to S$0.60. 

• In view of the uncertainties surrounding the GV deal, we have removed GV’s contribution from our earnings estimate. 
• After factoring in a slight improvement in margins for the core production segment and using an enlarged share capital from the recent equity fund raising exercise, EPS growth for FY18F and FY19F is still healthy at 9% and 34% respectively. 
• Target price based on SOTP is reduced to S$0.60. Reiterate BUY.

Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-08-14

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.60 Down 0.750