mm2 Asia - CIMB Research 2018-03-14: Setting The Stage For Further Earnings Growth

Mm2 Asia - CIMB Research 2018-03-14: Setting The Stage For Further Earnings Growth MM2 ASIA LTD. 1B0.SI

mm2 Asia - Setting The Stage For Further Earnings Growth

  • Overhang due to concerns over financing for Cathay Cineplex acquisition has been removed; we see potential for all subsidiaries of mm2 Asia to show earnings growth in FY18-20F.
  • Current valuation implies the market ascribes little value to mm2’s core production business and potential synergies. Maintain ADD, with an SOP-based Target Price of S$0.74.
  • We like the scalability of “Train to Busan” virtual reality (VR) touring show, which will be a new income stream for Vividthree ProductionsUnUsUaL is the other beneficiary.
  • Potential spin-off of post-production segment could cause the stock to re-rate.
  • Downside risks are unexpected production delay, cost overruns and high net gearing.

Overhang removed; core business undervalued 

  • The recent establishment of its US$300m medium-term note (MTN) programme should allay investor concerns about mm2’s ability to finance the Cathay Cineplex acquisition, in our view. 
  • mm2’s current market valuation (excluding UnUsUaL and the S$230m price tag for Cathay cinemas) prices its core production business at almost 60% discount to its regional peers’ CY18F P/E. Reiterate ADD on the stock as we see value emerging, with the potential spin-off of its post-production business as a potential near-term catalyst.

On board the “Train to Busan” 

  • mm2’s 51%-owned Vividthree Productions (Unlisted) recently announced that it has acquired the licensing rights for “Train to Busan”. The company, which specialises in 3D animation and visual effects, will be developing VR tour shows based on the movie. 
  • We expect Vividthree Productions to earn:
    1. development fees, and
    2. some commission on the sale of tickets and merchandise etc. 
  • from each attraction. 
  • We think the scalability of such travelling sets could be another earnings driver for the group.

Entertainment galore for Unusual 

  • UnUsUaL Limited  (UNU SP, Not Rated), in which mm2 has a 42% stake, recorded a 160% surge in core net profit to S$2.5m in 3QFY3/18 (9MFY18: S$6.6m). We expect the strong earnings growth momentum to continue in FY18-20F, driven by more concerts in North Asia (12-15 shows in Singapore p.a.) and new product line of 48 “Disney On Ice” shows in Korea and Taiwan over 2018-19F. 
  • Given its regional network and technical expertise, UnUsUaL could also secure the role of set construction and promoter for “Train to Busan”.

FY18-20F EPS to decline due to financing expenses 

  • While mm2’s 9MFY18 core net profit formed only 67% of our and Bloomberg consensus' full-year estimates, we deem this set of results as broadly in line, as we expect a stronger 4QFY18 from higher production income, and full three months' contribution from the recently-purchased Cathay Cineplex. 
  • We tweak our FY18-20F EPS lower by 2.6-2.9% on the back of higher financing expenses (now assume 4.0-4.5% MTN interest cost vs. 3.5% previously). Our SOP-based target price thus falls to S$0.74; maintain ADD.

All subsidiaries set to expand further 

  • We forecast double-digit EPS growth for mm2 over FY18-20F, led by an increasing production budget, as well as higher earnings from UnUsUaL and Vividthree Productions.
  • Stake dilution from the spin-off of its post-production segment is likely, but we think this could be compensated by stronger earnings growth via a different listing platform.
  • Downside risks to our ADD call are unexpected production delay or cost overruns, and a highly geared balance sheet.

NGOH Yi Sin CIMB Research | 2018-03-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.74 Down 0.760