mm2 Asia - DBS Research 2018-08-15: Continues To Deliver

MM2 ASIA LTD. SGX:1B0

mm2 Asia - Continues To Deliver

mm2’s 1Q19 net profit gained 13.2% y-o-y as revenue doubled.
North Asia remains key market; tapping into other regions.
Enhancing platforms capabilities with foray into virtual reality show and IP ownership.
Reiterate BUY, Target Price reduced to S$0.62 on lower valuation multiple.

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 (SGX:1D1).
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.
1Q19 results: Growth in revenue from all segments; 1Q19 revenue doubled to S$49m while net profit gained 13.2% y-o-y to S$7.2m.

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We value the production business at 18x PE, in line with peers listed in Asia, vs consensus’ valuation of about 22x.
For UnUsUaL (SGX:1D1), we value it at current valuation. For the cinema segment, we use 21x PE vs consensus’ 20x.

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.

Our sum-of-parts target price is now S$0.62, pegged to 18x FY19F earnings for core business, cinema and post production segment, and current valuation for UnUsUaL (SGX:1D1), reduced from 21x previously, in line with peers.

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.

mm2’s 1Q19 revenue doubled to S$49m, mainly contributed by Lotus and Cathay cinema chain, and also content production, distribution and sponsorship, post- production, event production and concert promotion.
mm2’s 1Q19 gross profit surged 114% y-o-y to S$17.6m on strong gross margin of 67.2% vs 62.4% in 1Q18. Net profit of S$7.2m (+13.2% y-o-y) accounted for 22% of our FY19F earnings, broadly in line. Net margins eased to 14.8% vs 26% in 1Q18, mainly due to higher contribution from the cinema business, which has lower margins.

mm2 has made several advancements in China recently, including Memorandum of Understanding (MoU) with several partners, to co-invest over the next 3 years a total of US$25m and to co-produce five films and multiple online films.
Beyond the Chinese market, which offers huge growth potential, mm2 is also seeking opportunities for regional film co- productions, and has formed a partnership to co-invest and co-produce 6 Thai and Indonesian films over the next three years.

mm2’s integrated content platforms and capabilities now span across most of the entire media supply chain, from production to distribution in various media formats including cinemas, concerts and virtual reality tour shows.
Vividthree (planning for a Catalist listing on SGX) is developing the upcoming Train to Busan Virtual Reality Tour Show while UnUsUaL (SGX:1D1) has become an intellectual property (IP) owner to develop and produce APOLLO, a show that celebrates the 50th anniversary of man’s first steps on the moon.
mm2 has also set up a joint venture company that operates the AsiaOne website, to create engaging digital lifestyle and entertainment content targeted at the growing local and regional demand for interactive digital editorial and video content.

We maintain our forecasts for FY19F and FY20F but lower our Target Price to S$0.62 as we have pegged the core business and post production segment at 18x FY19F earnings, from 21x previously, in line with peers.
Our sum-of-parts target price is now S$0.62 (prev S$0.70).

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2018-08-15

SGX Stock Analyst Report BUY Maintain BUY 0.62 Down 0.700