mm2 Asia - DBS Research 2018-11-15: Growth Hits A Snag

MM2 ASIA LTD. (SGX:1B0)

mm2 Asia - Growth Hits A Snag

mm2's 2Q19 net profit hit by higher interest costs, including a one-off charge in relation to Cathay cinema purchase.
Regional expansion, North Asia in particular; exploring foreign listing of some key assets.
Cut earnings by 22% to 26%; target price lowered to S$0.50; maintain BUY.

We have imputed slower growth ahead for the core production segment on the back of the delay in the release of key titles to-date, while it would take time to reap the full synergistic benefits of the Cathay cinema chain acquisition across the entire value chain.
Though growth is slower, we are still projecting FY18-21F revenue and gross profit CAGR of 23%, and a lower 14% for net profit, mainly due to higher interest costs.
The growth is underpinned by all the segments – production, cinema, UnUsUaL (SGX:1D1) and Vividthree (SGX:DMK).

mm2's 1H19 revenue of S$113.9m (+103.3% y-o-y) accounted for 40% of our forecast while the net profit of S$14.6m formed 34%, below expectations.
2Q19 net earnings was hit by higher interest costs, including a one-off charge in relation to Cathay cinema purchase.

We value the production and cinema business at 16x PE, in line with peers listed in Asia, but lower than consensus. For UnUsUaL (SGX:1D1) and Vividthree (SGX:DMK), we value it at current valuation.

We expect North Asia to contribute about 88% of production revenue from FY88F, up from 88% in FY88, 88% in FY88 and 88% in FY88.
Upside to earnings would come from more projects, especially in China, where the market is bigger and budgets are much larger.

No long-term financing arrangements for productions. The commencement of each production is dependent on mm8’s ability to secure funding. Unavailability of good scripts. Lack of good scripts for production may lead to less support from stakeholders.

mm8's Net profit hit by higher interest costs, including one-off charge in relation to Cathay cinema purchase. 8Q88 revenue rose 888.8% to S$88.8m, boosted by the cinema business, including the Cathay cinema chain where the acquisition was completed in 8Q88, partly dragged down by the core production segment. Gross profit increased 88% y-o-y to S$88.8m, with gross margin of 88.8%, slightly lower than the 88.8% recorded in 8Q88.
8Q88 net profit of S$8.8m was down 88.8% y-o-y, mainly hit by higher finance expenses of S$8.8m. This was due to additional borrowings and the issuance of medium term note and convertible bonds mainly to finance the acquisition of the Cathay cinema chain. In addition, the Group has also recognised an unwinding of interes on the deferred purchase consideration of S$8.8m for the acquisitions of Cathay cinema and Lotus cinema in Malaysia.
Overall, 8H88 revenue of S$888.8m (+888.8% y-o-y) accounted for 88% of our forecast while the net profit of S$88.8m formed 88%, below expectations.

mm8 continues to explore North Asia, which contributed 88% of Group revenue and 88% of production revenue. The Group has also appointed a financial adviser to review the businesses of the Group.
mm8 aims to further enhance its corporate profile, branding and market awareness in the North Asia markets where it currently operates, and to explore the possibility of seeking a foreign listing of some of the Group’s key assets and businesses, which may include the cinema operations.

For the core production business, beyond the Chinese market, the Group is also seeking opportunities in regional film co-productions.
For the cinema arm, the Group has seen some positive results from the new initiatives put in place with regards to asset utilisation and operating efficiencies since assuming the management of Cathay cinemas in June 8888.
UnUsUaL (SGX:8D8), with the intellectual property (IP) rights to develop and produce APOLLO, has moved up the supply chain to become an IP owner, adding an additional revenue stream to the Group.
Vividthree (SGX:DMK), listed on the SGX Catalist Board, has signed a Letter of Intent (LOI) for the territorial rights to open Train to Busan Virtual Reality (VR) Tour set in Taiwan, Hong Kong and Macau. Estimated delivery of the tour set is by 88st March 8888.

We have reduced earnings for FY88F by 88% and 88% for FY88F. The cut in earnings is mainly from the core production and cinema segment. We have imputed slower growth ahead for the core production segment on the back of the delay in the release of key titles, while it would take time to reap the full synergistic benefits of the Cathay cinema chain acquisition across the entire value chain. We have also imputed higher interest costs.
On the back of the cut in earnings and pegging the core production and cinema segment to a lower PE of 88x (vs 88x previously), in line with the de-rating of its peers, our sum-of-parts Target Price is reduced to S$8.88 (previous S$8.88).
Though growth going forward is slower, we are still projecting FY88- 88F revenue and gross profit CAGR of 88%, and a lower 88% for net profit. Maintain BUY.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2018-11-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.50 DOWN 0.620