mm2 Asia - Maybank Kim Eng 2018-04-22: No Business Like Show Business

SGinvestors.io

MM2 ASIA LTD. 1B0.SI

mm2 Asia - No Business Like Show Business

Initiate coverage with BUY

• We believe mm2 Asia is on the cusp of a healthy growth phase, backed by its media and entertainment acquisitions in the past 12 months. Reflecting this, we value it at SGD0.56 or 1x FY19E PEG on a FY18-21E core EPS CAGR of 21%. 
• Initiate coverage with a BUY with catalysts expected from regional expansion of its film, TV and event production businesses.

Early stage of multi-year growth

• mm2 Asia’s film and event production and distribution businesses are in their early stages of expansion in North Asia. Its recent Cathay cinema acquisition should provide recurring cash flows despite its lower EBITDA margins. It should also provide visibility of potential competing films for its film-production business. 
• We expect its film and event businesses to underpin a group revenue CAGR of 29% in FY18-21E.

Banking on experience & relationships

• Execution is a principal risk in its regional expansion and for our growth forecasts. Pipeline visibility is constantly in flux but mm2 will be capitalising on its senior management’s expertise, extensive experience and relationships to create business opportunities. 
• Its film-business focus has been shifting to North Asia, where nearly half its segmental revenue came from in FY17, up from 14% in FY15.

Growth at reasonable price

• Trading at 22.8x / 18.3x FY18E / FY19E P/Es, valuations are not demanding against Asian movie and entertainment companies’ 26.7x / 22.4x on profit growth of 12% / 19% vs mm2’s potential 16% / 25%. 
• Based on our Target Price and the last traded price of subsidiary UnUsUaL Limited (UNU SP, Not Rated), its remaining businesses are trading at an implied 15.6x /13.1x.

INVESTMENT SUMMARY

Early stage of multi-year growth

• We believe mm2 Asia provides multi-year, multi-country growth prospects in the media and entertainment sector. 
• Although traditional media is under pressure from online substitutes and / or content piracy, we believe mm2’s bread-and-butter businesses of film production & distribution, cinema and event production have in-built resilience in their established markets of Singapore and Malaysia.  Meanwhile, low-hanging fruits lie in new markets in North Asia through TV and eventually film production and local partnerships.
• We forecast a revenue CAGR of 29% for FY18-21E and core profit CAGR of 21%, led by regional expansion of its film, TV and event production businesses and its recent increase in its Singapore cinema assets. 
• Pegged to 1x PEG vs its current 0.9x, we have a SGD0.56 Target Price. Asia’s movie and entertainment sector trades at 1.7x PEG.

Towards a more balanced bet

• Every part of the group has been growing organically and through M&As in the past 12-18 months. 
  • TV and film production has been making progress in Greater China. China, Hong Kong and Taiwan combined are expected to generate 69% of segmental revenue in FY19E, up from 27% in FY16. 
  • Meanwhile, its cinema arm has completed the acquisition of unlisted Cathay Cineplexes. In our estimation, Cathay could contribute 37% to FY19E group revenue, though likely at the expense of EBITDA margins and ROEs. Both could drop to 34% and 17%, respectively from 38% and 31%.
  • Event production, via its 39% effective stake in UnUsUaL Limited (UNU SP, Not Rated), is pursuing its own regional expansion. We forecast it could account for 22% of FY19E group revenue and 21% of profits. By FY21E, UnUsUaL Limited could account for the biggest chunk of group revenue.
• We believe that M&As have led to a more diversified, though still media- and entertainment-centric, revenue base. This should mitigate earnings volatility, especially during economic downturns.

Failure to deliver is primary risk

• The DNA of group and segment management is making deals and delivering revenue and earnings growth on the back of these. There are no dividend plans during its growth phase, the market will likely price the stock based on management’s execution. With 330 years of combined experience and relationships among its senior management, we take a level of comfort in the group’s ability to deliver. 
• Every 5% change in our FY18E film and UnUsUaL Limited revenue forecasts affects our Target Price by 4% and 2%, respectively.
• Plans to list all its segments eventually could create risks of a conglomerate discount. However, we believe it is early days as value has  to be unlocked first. For example, UnUsUaL Limited’s stock has more than  doubled from its IPO price of SGD0.20. Yet, it remains thinly traded relative to its parent. 
• At UnUsUaL Limited’s current market price and mm2’s current valuation of 47.6x and 29.3x FY18E and FY19E P/Es, implied value of the group’s remaining parts is 15.6x and 13.1x. Also, UnUsUaL Limited’s average 3-month turnover of SGD0.5m or USD0.4m is not as adequate as mm2’s SGD1.0m or USD0.7m.

VALUATION

PEGging to growth

• As a young small-mid (SMid)-cap with geographical expansion ambitions, we believe mm2’s share price will be shaped more by its growth prospects than peer valuations at this stage. Asian peers are at different stages of earnings growth. 
• Furthermore, as mm2 operates myriad businesses in the movie and entertainment sector, it does not appear to have direct comparables. We value it at 1x PEG on an FY18E-21E earnings CAGR of 21% vs the Asian average of 1.7x. This translates to a Target Price of SGD0.56.

Size begets size? 

• mm2’s FY18E P/E of 23.1x is lower than its Asian peers’ 26.7x. Its potentially superior growth widens this discount by FY19E, with a P/E of 18.1x against 22.4x. 
• Asia’s movie and entertainment sector trades at 1.7x PEG on FY18-19E EPS growth of 12%/19%. However, as the sector’s PEG is weighted higher by companies with bigger market caps, we only use 1x PEG for mm2.

Stub value not demanding

• We cross-checked our target price with the implied value of its parts. With its 39%- effectively-owned event-and-concert organizer UnUsUaL Limited (UNU SP, Not Rated) trading at 47.6x/29.3x FY18E/FY19E P/Es, implied valuations for its remaining parts are 15.6x/13.1x. At our Target Price, its remaining parts would trade at 19.3x/16.2x. These are not demanding against Asian peer valuations.
• With mm2 group management aiming to eventually list its various parts to unlock value, a conglomerate discount may emerge but given such value is yet to be created for the majority of the parts we do not assume such discount in our target price. Although listed on the Singapore Exchange’s small board, Catalist, UnUsUaL Limited’s thin 3-month average turnover of SGD0.6m / USD0.4m may limit mm2’s valuation by the market. Nonetheless, UnUsUaL Limited trades at over 2x its IPO price of SGD0.20. 
• On 1 Feb 2018, mm2 announced the spin-off of its special-effects and computer-generated-imagery (CGI) studio, Vividthree, for an eventual Catalist listing. Meanwhile, it has also lined up SGD48m in convertible notes to prepare for its potential listing of its cinema business.

And then there were four

• Prior to our initiation there were only three FactSet consensus ratings.  Our revenue forecasts are 6%/4%/11% higher than consensus for FY18E/19E/20E, possibly reflecting more aggressive film, UnUsUaL Limited and/or cinema consolidation assumptions. However, our core EPS is -3%/-9%/- 0.4% lower as we have likely factored in more aggressive EBITDA-margin dilution by its lower-margin cinema business and/or UnUsUaL Limited’s expansion into lower-margin wholesale deals. 
• Our Target Price is 22% below consensus as a result of this and perhaps our PEG valuation methodology.

Risks of delivery, liquidity & acquisitions

• As a growth stock, we believe the main risk to our target price and rating is its revenue and earnings delivery. 
• Management provides geographical-revenue breakdown guidance for its film & TV business and similarly for UnUsUaL Limited but not overall revenue and profit targets. This lack of more concrete guidance reflects the nature of its businesses. For example, movie and TV viewer preferences are not entirely predictable as genres and story lines swing in and out of favour. 
• Meanwhile, although UnUsUaL Limited indicates the scaling of its shows to nearly double by FY20E from FY18E levels an increased portion of undisclosed wholesale or partnered events means the revenue growth will not match volume growth. Every 5% change in our film and TV production revenue forecasts can swing our profit forecasts by 5%/4% for FY19E/20E and our target price by 4%. Every 5% change in UnUsUaL Limited’s revenue can affect our profit forecasts by 1%/1% and our target price by 2%.
• Although the cinema business post-Cathay revenue volatility is likely to be low, upside and downside will likely be manifested in EBITDA margins as management aims to unlock more cost savings. We do not yet have visibility on cinema EBITDA but every 100bp change in FY19E group EBITDA margins would affect our profit forecasts by 7%/7% for FY19E/20E and our target price by 13%.
• With mm2’s 3-month average daily turnover at SGD1.0m or USD0.7m, there is liquidity risk in investing in the stock. Still, its 2-year Bloomberg adjusted beta is only 0.64, which may indicate that it trades on its own merits rather than general market conditions. However, before Aug 2017, the stock was listed on the Catalist rather than the main board. Going forward, it may become more linked with the main board.
• We have not assumed any future acquisitions or listing of its parts as timing remains uncertain. We believe, however, the group is always on the lookout for long-term value-accretive businesses. This appears to be in its DNA.

CORPORATE INFORMATION

Branching out from film roots.

• mm2 is an Asian media and entertainment conglomerate in film and TV production and distribution, cinema management and event production. Singapore and Malaysia are its main revenue centres since its founding in 2008. Since its IPO in Dec 2014, management has been expanding to North Asia. 
• From originally a largely film production and distribution operation, the company has made strategic acquisitions and partnerships to its current form. Revenue and earnings are set to evolve further as it digests its latest and largest  cinema acquisition and pursues growth in events and concerts.
• mm2’s senior executives have over 300 years of experience among them. The group’s production and distribution business is highly dependent on being able to sell a story at the film investor stage and ultimately at the end viewer stage. As such, management experience in creating, maintaining and building relationships with vendors, partners, investors and sponsors is critical. 
• Assembling and synergizing the newer business segments with the old ones is intended to build new business pillars and avoid silo mentality.

Film / TV / online content production & distribution

• Grow revenue per project rather than volume. As the original founding segment, film, TV and online content production, distribution and sponsorship are considered the core business of mm2 Asia. With management eyeing to sustain its 18-month pipeline of 35-40 ongoing - though not necessarily completed - projects, revenue growth is expected to hinge on production budgets that are typically scaled according to target regions and / or countries. mm2 selectively takes equity in film projects but generates the bulk of its revenue as a production house that bands film investors with idea generators. External film investors include film private-equity funds, parties with access to government grants, content distributors such as StarHub (STH SP, Rating: HOLD, Target Price SGD2.27) and film-production companies. In Mar 2018, mm2 and Fox Networks Group Asia announced the co-production of six Chinese-language features that mm2 will distribute with Fox taking television and digital rights.
• Expanding reach and markets. From its comfort zone of Singapore and Malaysia where management has had the longest track record, it has branched out to North Asia. China, Taiwan and Hong Kong accounted for 48% of its core revenue in FY17, from just 14% in FY15. Management’s goal is to lift this number to 80-90% of core revenues vs our forecast of 75% by FY21E. Based on forecasts by PwC, China’s box-office revenue should increase by an 11.6% CAGR over 2016-21E. China is expected to close its gap with US box office. China’s 41,056 screens in 2016 already outnumbered the US’ 40,928. Their gap is expected to widen by 2021E. Management is not targeting national-level, mega-budget productions in China but rather picking its battles in selected provinces with more localised content. The local Chinese city budgets, nevertheless, can be bigger than Singapore and Malaysia as countries.
• Share and share alike. In China, mm2 generates revenue from TV production rather than films. Such shows, however, involve higher budgets and revenue than films in Singapore and Malaysia. Management hopes that successful production in smaller markets, particularly Chinese-speaking ones, can be pitched and replicated in its larger markets. To this purpose, it has set up offices in Singapore, Malaysia, Hong Kong, Taiwan and China. It is also expanding in non-Chinese-speaking markets such as Korea, Japan, Thailand and India. The US presence is a hybrid with areas with large Chinese-speaking communities being the target.
• mm2’s productions compete with the global offerings of major  film and TV studios but its distribution and cinema segments offer a measure of visibility for its film releases so as to avoid scheduling clashes. Online / digital content competition is an increasing threat but the group is actively exploring its own options on such platforms.

Event & concert production & promotion

• Living in UnUsUaL times. mm2 acquired its stake in UnUsUaL Limited in August 2016 by taking a 51% stake in UnUsUaL Limited’s unlisted parent company, UnUsUaL Management. On 16 Apr 2018, UnUsUaL Management sold down a 5.4% stake in UnUsUaL Limited for SGD25.8m to His Royal Highness Prince Abdul Qawi of Brunei and a regional SMID fund, R3 Asian Gems. This was  to accommodate them as strategic investors. Following this sale, UnUsUal Management’s stake has shrunk to 76.79% from 82.18%, with mm2’s effective stake in UnUsUaL Limited now at 39.2%. 
• We estimate mm2 could book a SGD11.9m gain from the above stake sale in FY19E, based on the shares’ Dec 2017 book value. Other methodologies could yield lower gains but they should all be booked as exceptional items.
• UnUsUaL Limited was listed on Catalist in Apr 2017. It began as a sound, lighting and visual (SLV) equipment provider in Singapore but ventured into event production in 1997. It was eventually vertically integrated with promotion and venue-management operations it acquired in 2003 and 2005, respectively. 
• The company has handled events in Hong Kong, Malaysia, China, and Taiwan for various artistes such as Air Supply, Andy Lau, Cesar Millan, Chang Hui Mei, G.E.M, Hillsong, Jacky Cheung, Jay Chou, JJ Lin, Kim Soo Hyun, Lee Min Ho, Lionel Richie, Mariah Carey, Michael Bublé, Park Bo Gum, Pet Shop Boys, S.H.E., Stefanie Sun, Rain and Yanni.
• In Singapore, management sees no major competitor that can match UnUsUaL Limited’s track record and relationships with artistes and their intermediaries. However, there are no published statistics that can measure its market share. Management believes part of its current momentum with artistes and event producers stems from its Catalist listing, which anchors the company’s position as a legitimate player for the long haul, particularly in new markets.
• In Oct 2017, management announced the signing of a letter of intent with unlisted Feld Entertainment to present 48 Disney On Ice shows in Korea and Taiwan. The same disclosure mentioned that UnUsUaL Limited would “look forward to more collaborations” with Feld. Management hopes to roll out more family-oriented entertainment shows on its own or with other partners.
• From 20-30 shows a year, UnUsUaL Limited aims to scale up through regional expansion and partnerships to a medium-term target of 100-200 eventually. Revenue upside will also be explored through special benefits and access type of ticketing such as backstage passes and artiste interaction during an event.

Cinema

• Following its acquisition of 100% of Cathay Cineplexes in Singapore on 24 Nov 2017, mm2 is now the second-largest cinema operator in Singapore with 64 screens and 11,364 seats. It is the fourth-largest in Malaysia. 
• The balance of SGD215m from its SGD230m purchase price at 48x FY17 P/E is due for payment in May 2018. mm2 will fall back on a mix of debt and internal funding. Equity-based funding is not anticipated as the cinema business generates positive cash flows. 
• On 7 Feb 2018, the company issued SGD48m of convertible notes and bonds to fund its wholly-owned cinema subsidiary, MM Connect, with a 2% coupon. This is payable in three years or if and when MM Connect is listed. In the latter scenario, holders can opt to convert to equity stakes and sell through the IPO. 
• On 10 Mar 2018, the company also announced a USD300m multi-currency medium-term note programme. Proceeds will probably be utilised for the balance of its Cathay payment and potential acquisitions. Our forecasts only anticipate an additional SGD100m of financing being utilized.
• Although traditional media and entertainment is under global threat from digital substitutes and piracy, screens and box office in Asia in general and China in particular continue to grow.
• Cinema still has legs. For certain genres and theatre set-ups, the communal experience of the big screen and snack amenities available from the confectionary provide a form of family entertainment. Studies by Forbes in Oct 2017 and Movio in Jun 2016 suggest that cinema attendance remained healthy even among US millennials. Movio estimated that millennials accounted for 29% of box-office receipts and 31% of cinema- loyalty programmes.
• In 2017, Cathay had 24% of Singapore’s 235 industry screens. Screens in the country grew by a 5.1% CAGR over 2012-2017, with seats increasing 0.8%. Within the period, however, seat occupancy fluctuated. This likely tracked a reconfiguration of cinemas for more premium seats. mm2 aims to improve Cathay’s EBITDA and returns by focussing on operating cost efficiency and unlocking more revenue opportunities in developing its confectionery operations. Specifically, it plans to: 
  1. introduce more online and mobile app promotions and ease their use; 
  2. increase contributions from advertisements / confectionery / F&B and advertising divisions; and 
  3. increase distribution revenue by negotiating with international film distributors. 
• Management ideally would like to raise F&B to 30% of cinema revenue from 10% and hit a 20% EBITDA margin.

Post-production

• Planned listing to fund expansion. Unlisted 51%-owned subsidiary, Vividthree Productions, is a post-production studio with 3D-animation, computer-generated-imagery and visual-effects (VFX) capabilities. In FY17, it was behind 4% of group revenue and gross profits. Management announced plans to list this on Catalist to raise funds for its growth in Jan 2018. 
• We have not factored in any IPO, expansion or new businesses in   this note.

FINANCIAL ANALYSIS

P&L Analysis: Core to lead the way

• We estimate that Cathay’s full-year consolidation will form 37% of group revenue vs 40% from mm2’s core film business by FY19E. This is despite our forecast of the core business growing at a healthy double digit pace. With cinema growth generally low, we do not see it keeping pace with the rest of mm2’s businesses after FY19E. 
• It is UnUsUaL Limited that we forecast will eventually achieve economies of scale that will enable it to pull in line with the cinema business by FY20E at 30% of revenues and pull ahead of all businesses by FY21E at 38% of revenues. 
• On balance, we believe mm2’s acquisitions have reduced its earnings volatility through vertical and horizontal integration. An added bonus is that both its film and event businesses are in a high-growth stage.

Film: There’s no business like show business

• We forecast a 3-year revenue CAGR of 17% for FY18-21E as mm2 continues to expand in North Asia. North Asia accounted for 48% of film revenue in FY17. This should increase to 75% by FY21E. With Singapore and Malaysia being well-tapped, breaking into various Chinese cities will be key, in our view, especially as management aims to maintain its 18-month, 35-40 production pipeline and increase revenue through project budget rather than volume. 
• Among all its businesses, film is most susceptible to demand and returns volatility, in our view. This is because a movie’s appeal can differ from country to country and city to city and with time. Our forecast of North Asia’s revenue weight at 75% is below management’s long-term target of 80-90%.
• Scale matters. We assume that China will provide the bulk of growth. mm2’s mature markets of Singapore and Malaysia only provide 2% and 3% of our 28% revenue CAGR for FY18-21E. Core film revenue CAGR is assumed at 17%. The budget per production the film division team bags in the various countries provides the volatility to such expectations.

UnUsUal’s returns generated by usual preferences

• We are more bullish on events and concerts under UnUsUaL Limited. We have a 3-year revenue CAGR of 53% for UnUsual Management for FY18E-21E. This implies it would overtake film’s growth by FY21E. We forecast it will account for 38% of consolidated revenue by then, from 24% in FY17. 
• Growth sources are anticipated from:
  1. scaling up production from 20-30 shows a year to 100-200;
  2. using known artistes or franchises rather than testing new waters as in the case of film; and
  3. more avenues to slice and dice low- to high- income segments to generate additional revenue.
• Via its recent Disney on Ice breakthrough deal in Korea, UnUsUaL Limited is likely to increase its regional exposure.
• Produce, co-produce or manage? We believe UnUsUaL Limited has the fastest growth potential of mm2’s businesses. Its growth should be led by new markets such as Korea and is reflected in our assumptions of a 57% overall revenue CAGR for FY18E-21E. We expect UnUsUaL Limited to account for the bulk of revenue by FY21E. Management’s 100-200-shows-a-year target implies 49-115% volume growth for UnUsUaL Limited. 
• We assume that revenue from new markets will grow by a 134% CAGR. Aside from Korea, management intends to penetrate China, the Philippines and Australia. In order to increase its number of shows, UnUsUaL Limited is discussing with potential local partners for co- production or pure event management. Its eventual ratio of full production to pure event management could shape its revenue and margin outlook. Pure event management bears lower revenue and margins but carries lower operating and cash-flow risks.

Cinema provides stable cash flows

• M&A growth with potential EBITDA upside. Cinema revenue should stem from the 4-month consolidation of its Cathay acquisition in FY18E and full- year consolidation subsequently. FY18E revenue should also be supported by its acquisition of Lotus Fivestar cinemas. 
• Subsequent to FY19E, we assume no further acquisitions. FY19E growth should derive from its confectionery business where management aims to create value as explained in the previous section. 
• Management is also exploring avenues for cost efficiency for the newly acquired cinemas to further improve the segment’s EBITDA margin. Management also indicates that direct involvement in its cinema business gives it the benefit of foresight of potential competition from major films. It can then adjust its release schedules accordingly.

Margins

• First lower, then stable. We expect lower margins from UnUsUaL Limited and cinema to dilute the group’s gross profits and EBITDA margins in FY18E, as they become larger parts of the pie. As all its three businesses build scale and manage costs after FY19E, we forecast margin enhancement and stable gross margins.
• Revenue and margins can diverge from expectations if its mix of wholly- produced versus partnered films / shows and distribution changes. The latter carries lower revenue and margins but also lower execution risks. In film, management is open to taking direct 10% or less equity stakes in productions which offer upside potential.

Cash-flow analysis

• With full payment for its Cathay acquisition due in FY19E, we forecast negative FCF for FY19E. This would put the company in net debt of SGD64m for 22% net gearing or 0.7x net  debt/EBITDA. We estimate that its balance sheet would revert to net cash in subsequent years. We have not included further acquisitions or stake sales.
• In the event that it utilises its remaining SGD200m credit facility in FY19E and assuming no immediate contributions from any assets acquired with this facility, gearing would balloon to 89% instead of 22%. Net debt to EBITDA would surge to 2.8x from 0.7x. Strong cash flows, however, should bring this down in the next two years.
• Given management’s deal-making history, we have not assumed cash dividends.

Luis Hilado Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-22

SGX Stock Analyst Report BUY Initiate BUY 0.56 Same 0.56