mm2 Asia - CGS-CIMB Research 2019-10-08: Set For The Bigger Stage

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

mm2 Asia - Set For The Bigger Stage

  • We like MM2 ASIA (SGX:1B0) as an integrated media play, with 15.0% FY20-22F PATMI CAGR underpinned by robust Unusual pipeline and cinema turnaround.
  • Replication of More than Blue’s success is a potential catalyst for the stock; its China box office also contributed to higher receivables in 1QFY20.
  • Possible stake monetisation could lower net gearing and finance expenses by S$1.2m-6.0m. We expect share price re-rating to follow. Maintain ADD.

Expect earnings growth to return from 2QFY3/20F

  • Our recent conversation with mm2 Asia management reaffirmed our view that earnings growth will resume from 2Q20F after a lacklustre 1Q20 (PATMI -4.1% y-o-y), on a stronger pipeline by UnUsUaL (SGX:1D1) and post-production work. These, coupled with enhanced profitability of the cinema operations and more moderated growth in production budget, underpin our FY20- 22F topline and PATMI CAGR of 7.8% and 15.0%, respectively.
  • At 12.3x FY20F P/E (1 s.d. below historical mean and 60% lower than sector average), we think the tapering growth has been more than priced in and see potential upside from current level. See mm2 Asia share price.

Stake monetisation could add S$1.0m-4.6m to FY20F earnings

  • While mm2 Asia’s aggressive pursuit of acquisitions in the past has led to its high net gearing (0.85x as of end-1Q20), we see no repayment issue with its net debt/EBITDA still within debt covenant ratios.
  • Debt restructuring remains on the cards, which include possible monetisation of its stakes in the three subsidiaries that could raise at least S$20m-105m proceeds. Assuming all these go towards reducing borrowings, we estimate finance cost savings of S$1.2m-6.0m, which could boost our FY20F earnings by S$1.0m-4.6m (exclude one-off gains) and bring net gearing in the range of 0.4-0.7x. A share price re-rating should follow.

Expect easing trade receivables in 3QFY20F

  • Trade receivables and film intangibles have been on a rising trend in tandem with mm2 Asia’s increasing production topline and exposure to North Asia. Of the trade receivables which formed 2/3 of S$173m receivables as at end 1Q20, we estimate c.S$25m is related to the box office hit More than Blue in China (global box office of US$153m).
  • We expect more visible easing of trade receivables in 3Q20F, while receivables turnover has improved from 180-190 days on average over FY13-16, to c.130 days over FY17-19. Film intangibles also rose as the group acquired new film rights and more film under production gets completed.

Still a growing integrated media play; maintain ADD

  • We lower our FY20-22F EPS by 4.9-9.6% to reflect a stronger Unusual pipeline but less aggressive growth assumptions for mm2 Asia’s core and post production segments. We maintain our ADD call with a lower SOP-based Target Price of S$0.32.
  • Successive box office hits, faster cinema turnaround and successful debt restructuring are potential catalysts for the stock.
  • Downside risks: production cost overruns and balance sheet mismanagement.

NGOH Yi Sin CGS-CIMB Research | https://www.cgs-cimb.com 2019-10-08
SGX Stock Analyst Report ADD MAINTAIN ADD 0.32 DOWN 0.370