mm2 Asia - DBS Research 2018-05-30: Robust Growth In All Segments

Mm2 Asia - DBS Vickers 2018-05-30: Robust Growth In All Segments MM2 ASIA LTD. SGX: 1B0

mm2 Asia - Robust Growth In All Segments

  • mm2 Asia's FY18 net profit jumped 51% y-o-y - in line; core business remains strong.
  • Continue to expect stronger growth in North Asia, which accounted for 57% of FY18 production revenue.
  • A stronger platform with Cathay with content creation capability beyond films and TV to virtual reality.
  • Reiterate BUY, Target Price reduced to S$0.70 on lower valuation peg, in line with peers.



Growth path on track.

  • We continue to expect strong earnings CAGR of 25% for FY18-20F, underpinned by growth in production, expansion into the China market, and contribution from UnUsUaL
  • The stronger cinema arm, with the completion of Cathay cinema acquisition, helps the group build a recurring income base. 
  • Having a strong presence in the entire value chain of content creation and distribution further cements mm2's status as the leader in the media/entertainment industry.



FY18 results:

  • mm2 Asia's FY18 revenue doubled y-o-y to S$192m, 12% above our expectations while net profit of S$26.4m (+51% y-o-y) was in line with our forecast. All business segments registered strong growth.



Where we differ: Slight difference in valuation peg vs consensus.

  • We value the production business at 21x PE, in line with peers listed in Asia, vs consensus’ valuation of about 22x. 
  • For UnUsUaL, we value it at current valuation. 
  • For the cinema segment, we use 21x PE valuation peg, vs consensus’ 20x.



Potential catalyst:

  • Reaping the fruits of labour in North Asia. We expect North Asia to contribute > 60% of production revenue from FY19F, up from 36% in FY16, 56% in FY17 and 57% in FY18. 
  • Upside to earnings would come from more projects, especially in China, where the market is bigger and budgets are much larger.



Valuation:

  • Reiterate BUY, Target Price reduced to S$0.70. 
  • Our sum-of-parts target price is now S$0.70, pegged to 21x FY19F earnings for core business, cinema and post production segment, and current valuation for UnUsUaL, reduced from 25x previously, in line with peers.


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.
  • Unavailability of good scripts. Lack of good scripts for production may lead to less support from stakeholders.


WHAT’S NEW - FY18 net profit grew 51% y-o-y; Core business remains strong


Results highlight: FY18 net profit in line.

  • mm2 Asia’s FY18 revenue doubled y- o-y to S$192m, 12% above our expectations while net profit of S$26.4m (+51% y-o-y) was in line with our forecast. The increase in revenue was mainly due to the acquisition of cinema assets – Lotus and Cathay Cineplexes, and also its core business, and full year contribution from UnUsUaL, as compared to 5 months in FY17 as UnUsUaL was acquired by the group in August 2016.
  • Core business of production and distribution increased by 65.4% to S$93.6m, with North Asia contributing 57% of total revenue, in line with what we have been highlighting that North Asia is a key growth area for mm2 Asia.

Continue to expect stronger growth in North Asia.

  • The Group’s core business in Singapore continues to show growth, but Hong Kong, Taiwan and China are expected to grow faster. 
  • mm2 expects to see a higher number of film productions and co-productions coming out of Hong Kong, Taiwan and China as it leverages its strong network of contacts and talents, especially with UnUsUaL’s proposed acquisition of Beijing Wish Entertainment, which would enable UnUsUaL to offer multi-territory promotional deals.

A stronger platform with Cathay.

  • Since the completion of acquisition of Cathay Cineplexes in May 2018, mm2 has further strengthened its position in the multiple platform businesses. It has also signed a binding term sheet with Singapore Press Holdings to form a company that operates the AsiaOne website, making it a lifestyle, entertainment and news portal for urbanites in Asia.
  • Being the only cinema operator in Malaysia and Singapore, with a major presence in both countries, mm2 can now enjoy the synergistic benefits from the entire value chain.

Content creation capability beyond films and TV to VR.

  • Vividthree’s foray into virtual reality (VR) to create VR tour shows based on the popular 2016 Korean blockbuster - “Train to Busan”- in all territories outside South Korea has transformed the group’s content creation capabilities to extend beyond films and TV.


Earnings and Recommendation


Reiterate BUY, Target Price of S$0.70.

  • We tweaked our FY19F and FY20F numbers slightly higher to account for the larger contribution from core business, partly offset by higher interest cost.
  • We have also pegged the core business and post production segment to 21x FY19F earnings, reduced from 25x previously, in line with peers. Our sum-of-parts target price is now S$0.70 (prev S$0.75).







Lee Keng LING DBS Vickers | https://www.dbsvickers.com/ 2018-05-30
SGX Stock Analyst Report BUY Maintain BUY 0.70 Down 0.750



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