mm2 Asia - DBS Research 2019-08-14: Value Emerging

MM2 ASIA LTD. (SGX:1B0)

mm2 Asia - Value Emerging

MM2 ASIA (SGX:1B0)'s 1Q20 figures broadly in line; steady improvements in core and cinema business; weaker event and concert segment.
Strong project pipeline for core production and UnUsUaL.
Potential catalyst: Group’s deleveraging/restructuring.
Tweak earnings down by 6% to 10%; Target Price lowered to S$0.29.

We see value in mm2 Asia at the current share price. Based on sum-of-the-parts valuation, and stripping out its stakes in UnUsUaL (SGX:1D1) and Vividthree (SGX:OMK), the market is valuing the core production and cinema segment at about S$100m, which works out to P/EBITDA of below 2x, which is too low in our view.
The synergistic effect from owning cinemas takes time to realise. mm2 Asia paid 13.8x P/EBITDA for the Cathay cinema chain in Singapore and about 8-9x for the Malaysia cinemas while peers are trading at about 4.8x. It has been penalized by the market with mm2 Asia share price down by c.70% from the peak before the announcement of the cinema acquisition.
Near-term catalysts would include deleveraging or restructuring in order to maintain a higher margin.
Reiterate BUY.

We value the production segment based on a lower PE multiple, and P/EBITDA for the cinema. For UnUsUaL and Vividthree, we value these at current market valuations, vs PE valuations used by consensus.

1Q20 results broadly in line. 1Q20 revenue of S$49m was flat y-o-y but down 37% q-o-q. The stronger performance for the core business and cinema segment was offset by weaker performance for UnUsUaL and Vividthree. Gross profit margin of 61.6% is lower than 1Q19’s 67.2% but much higher than 4Q19’s 43.3%, partly due to higher-margin service-related revenue for 1Q20 as compared to the previous quarter, and also difference in types of project.
Overall, net profit of S$6.95m (-4% y-o-y, +12% q-o-q) accounts for 32% of our FY20F numbers, broadly in line as 1Q is traditionally a stronger quarter.

UnUsUaL reported a 28% and 54% y-o-y drop in revenue and net profit respectively for 1Q20 as most of its larger-scale projects like “Walking with Dinosaurs” and “Apollo” would only be recognised from 2Q20 onwards.

The 11.3% y-o-y drop in 1Q20 revenue to S$1.6m was mainly due to lower contribution from the content production segment. A lower net margin of 19.4%, partly due to higher admin costs vs 55.7% in 1Q19, led to a 69% drop in 1Q20 earnings to S$0.31m.

For the core production business, the group has about 40 productions with a total budget of about S$150m in the pipeline for the next 12-18 months. UnUsUaL is inclined towards a full-year growth with a robust line-up of concerts/theme shows including Westlife, Andy Lau, Kang Daniel, JJ Lin, Disney’s “Frozen” and “Walking with Dinosaurs”.

Vividthree has signed an MOU for “Doraemon Experience” (DE) project.
Under the MOU, Vividthree will collaborate to develop the DE show with an immersive experience integrating the elements of virtual reality and augmented reality. The DE show is intended to be made available in Singapore within the next 12 months, followed by other regional parts of Asia.

For the cinema segment, the split in revenue for Singapore and Malaysia is about 70%/30%. Cathay in Singapore is ranked second, with a market share of about 28% while top-ranked Golden Village has a 39% share. With a stable outlook in terms of cinema attendance, average ticket price and box office receipt, contribution from the Singapore cinema should at least be maintained going forward.

mm2 Asia is ranked fourth with a market share of about 12%. All key indicators - cinema attendance, average ticket price and box office receipt, registered moderate growth in 2018. We expect this trend to continue.
Overall, we forecast a moderate 3% growth each for FY20F and FY21F for the group’s cinema business.

We have adjusted earnings down by 6% for FY20F and 10% for FY21F, to account for higher interest expenses as a result of higher debt assumption. The Group has secured an additional debt of S$27.5m as at end 1Q20, mainly for the core production segment.
Target Price is adjusted lower to S$0.29 (previously S$0.34) based on sum-of-parts valuation, as we have used a lower valuation peg at a 20% discount to peers for the core production and cinema segments, pending the successful deleveraging/restructuring efforts to improve margins.

mm2 Asia moved into a net debt position following the acquisition of Cathay Cineplexes for S$230m in November 2017, that was financed mainly via debt. The high interest has affected the bottom line. Going forward, mm2 Asia would have to deleverage in order to maintain a decent net margin.
A spinoff of the cinema business could be an option to address this issue in the long run. Alternatively, the group could explore the option of divesting its 39% holding in UnUsUaL and 42% stake in Vividthree, or bring in strategic investors.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-08-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.29 DOWN 0.340