mm2 Asia - CGS-CIMB Research 2019-02-14: Near-Term Pain, Long-Term Gain

MM2 ASIA LTD. (SGX:1B0)

mm2 Asia - Near-Term Pain, Long-Term Gain

mm2 Asia's 3QFY3/19 core PATMI fell 59% y-o-y to S$2m, missing our/consensus forecasts.
We lower FY19-21F EPS by 29-30% and our SOP-based Target Price to S$0.37. Our ADD call is premised on 25-32% EPS recovery in FY20-21F.
Faster cinema turnaround and deleveraging of balance sheet are the two potential re-rating catalysts

MM2 ASIA LTD. (SGX:1B0) reported 3QFY19 core PATMI of S$2.0m (-59.0% y-o-y), which was below our and consensus expectations despite 41.3% topline growth. 9MFY19 core PATMI formed 45%/50% of our/Bloomberg consensus full-year forecasts.
We attribute the results miss to
1. higher-than-expected financing costs of S$1.6m from the deferred purchase consideration post the finalisation of purchase price allocation (PPA) for cinema acquisitions earlier,
2. a higher effective tax rate due to non-tax-deductible interest expenses, and
3. higher operating costs from slower cinema turnaround.
We note that 4Q is seasonally stronger across most segments.

We cut our FY19-20F EPS by 29.2-30.0% as we adjust for higher financing and tax expenses. Our SOP-based Target Price thus falls to S$0.37, which now ascribes little value to cinema as we await faster turnaround; maintain ADD. Refer to Fig3 in the the attached PDF report for the breakdown of SOP valuation.
Recall that mm2 Asia previously bought Cathay Singapore and Malaysia cinema operations for S$230m and S$53m respectively. The group’s net gearing remained largely unchanged at 0.67x as at end-Dec 18.
Potential re-rating catalysts include robust earnings recovery and faster cinema spinoff/ turnaround.
Downside risks are cost overruns and balance sheet mismanagement.

UNUSUAL LIMITED (SGX:1D1)’s (39%-owned by mm2 Asia) strong sales momentum continued in 3QFY19, growing 50.0% y-o-y. We think FY20F will benefit from more family entertainment and travelling shows (APOLLO, Walking with Dinosaurs).
However, higher promotion revenue contribution and some reclassification of related admin expenses to its cost of sales resulted in a lower gross margin (-0.7%pts) of 31.5% in 3Q; core PATMI improved 21.7% y-o-y to S$3.1m.

VIVIDTHREE HOLDINGS LTD. (SGX:OMK) (41.5%-owned by mm2 Asia) saw a successful opening of its Train to Busan set in Beijing late last year, recording over 200 ticket admissions per day on average in the first month at average pricing of more than S$30.
Apart from earning territorial rights fees and ticket royalties, we expect stronger earnings contribution from the sale of more production sets in the coming quarters. 3QFY19 core net profit was 16.0% y-o-y lower at S$1.2m.
With a net cash position of S$7m, management aims to secure more content rights and complementary businesses.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-14

SGX Stock Analyst Report ADD MAINTAIN ADD 0.37 DOWN 0.500