mm2 Asia - Maybank Kim Eng 2019-03-25: Needs To Be “More Than Blue”

MM2 ASIA LTD. (SGX:1B0) | SGinvestors.io MM2 ASIA LTD. (SGX:1B0)

mm2 Asia - Needs To Be “More Than Blue”

Movie optimism reflected; Downgrade to HOLD

  • Reported good showing of MM2 ASIA LTD. (SGX:1B0)’s latest movie “More Than Blue” (比悲伤更悲伤的故事, see report) that has led to another tie-up with Fox Networks Group Asia (see report) has likely driven mm2 Asia share price’s recent re-rating.
  • We make no changes to forecasts as we await divisional disclosures in fiscal-year-end reporting, particularly on the cinema side.
  • We think optimism has been priced in and downgrade the stock to HOLD from BUY. Maintain our 1x PEG-based Target Price of SGD0.34.
  • Cinema performance and its impact on leverage are key upside and downside risks to our outlook.

Not windfall gain but decent one, nonetheless

  • Although mm2 Asia itself is not an investor in the above film, it stands to gain from 8-12% producer bonus fees from any hits. Assuming the movie cost SGD5m to produce, additional revenue could be SGD0.4-0.6k. However, the market may be anticipating gains more proportionate to the SGD66m box office grossed by the movie over its first weekend in China.
  • We also note that mm2 Asia has entered into a SGD115m refinancing facility (see mm2 Asia's announcement dated 21-Mar-2019) that could lower its future interest expenses, a positive.

Hits are more long-term than near-term positives

  • Recall that by focussing on production rather than film investments, mm2 Asia's core production business is insulated from volatility, in either direction. However, the more hits mm2 produces theoretically provides reputational gains to bag future production work from regional/global players – hence, its recent Netflix (see Netfix press release) and Fox production deals (see mm2 Asia's announcement dated 07-Dec-2018).
  • Management actively connects investors with writers/directors to get production work.

Lifting the fog would help

  • We continue to view its content-production business favourably, supported by a healthy pipeline. Big-screen content risks due to changing - and a new generation of - viewer habits remains a perception issue, hence more content for streaming could be essential.
  • Unfortunately, mm2 Asia's Cathay cinema acquisition has clouded all interim visibility of its production business and overall prospects due to leverage.
  • Although upcoming fiscal-year results could provide visibility of all parts, this would be followed by a 9-month revenue fog unless management enhances interim disclosures.

Luis Hilado Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-03-25
SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.340 SAME 0.340