mm2 Asia - DBS Research 2020-03-25: Impact Worsened By New Measures

MM2 ASIA LTD. (SGX:1B0)

mm2 Asia - Impact Worsened By New Measures

mm2 Asia (SGX:1B0) core business’ near-term outlook impacted; demand in China could revive soon.
Cinema affected by postponement of mega movie releases and reduction in audience attendance.
Clampdown of large-scale gathering equals no-show for UnUsUaL (SGX:1D1).

The COVID-19 has affected the various segments of the group. With the worsening situation especially outside China, more regions are implementing additional measures to help contain the spread of the virus.
We have cut earnings for mm2 Asia's FY20F/FY21F by 26%/90%, as the bigger impact will be felt in FY Mar 2021.

Core content production operations are affected, as countries implement movement restrictions and consumers stay at home to help contain the spread of the virus. The group is tapping on the available government support packages to reduce the impact of the COVID-19 outbreak.
Demand in China is expected to return, as the COVID-19 situation shows signs of coming under control. The risk lies with the nascent recovery in China taking a turn for the worse as Beijing tightens quarantine rules for overseas travellers as China reported a two-fold increase in new coronavirus cases. North Asia contributed c.70% of production revenue in FY19. Also, given mm2 Asia's global presence in various countries including China, Hong Kong, Taiwan, Singapore and Malaysia, its productions can be easily exported across the region.
About 80% of current production has resumed operation in regions not affected by the lockdown. The group continues to build on its library of films, targeting online platforms like Netflix. Thus, FY20F could still see an increase in revenue, partly helped by projects completed earlier. Going forward, funding for projects may not be readily available given a weaker global economy.

The cinema business is affected by the postponement of scheduled Hollywood mega-movie releases. Cinema attendance is also affected, especially with the current lockdown in Malaysia, and the latest measure in Singapore to close entertainment venues including cinemas, from March 26 to April 30.
We expect cinemas to continue to adhere to the social distancing regulation even upon lifting of the temporary closure measure. Cinemas would need to have alternate seat arrangements, which implies a 50% cut in available seats.
To mitigate the reduction in audience attendance, the group has implemented numerous measures including, among others, fixed cost reductions, productivity improvements, and other initiatives to enhance operational efficiency. It could also get some rental rebates from the landlords.

39%-owned UnUsUaL (SGX:1D1) has postponed all scheduled concerts due to the clampdown of large-scale gatherings in most or all its target countries.
To mitigate the impact, UnUsUaL has implemented pay cuts of 10% to 20% for all its staff. It is also a beneficiary of government support packages. Bigger competitors like Cirque du Soleil Entertainment Group, is also badly affected, cutting 95% of its workforce recently.
In terms of cashflow, there is no immediate concern as the group has already recovered deposits for the previously scheduled concerts, which forms the bulk of the cash outflow. We expect revenue for FY20F to still register a 20% growth, helped by the 48% increase in 9M FY20F revenue.

We have cut earnings for FY20F/FY21F by 26%/90% to factor in the worsening impact from COVID-19 especially in regions outside China. Our assumptions include gradual improvement in the fight against COVID-19 from 2HFY21F onwards (September 2020) and a recovery in FY22F. We also expect the group to benefit from more government support packages to help to cushion the impact.
Operating cashflow should still be positive as the collection of trade receivables has so far not been significantly affected. However, given the expected prolonged negative impact from the COVID-19, we would not rule out the possibility of weakening cashflows.
In terms of financing, the group has refinanced its loan facility with a 5-year secured loan of S$115m entered last year. Close to S$100m debt is due in 2021.

Downgrade to FULLY VALUED with lower Target Price of S$0.107, based on sum of parts valuation.
See mm2 Asia Share Price; mm2 Asia Target Price; mm2 Asia Analyst Reports; mm2 Asia Dividend History; mm2 Asia Announcements; mm2 Asia Latest News.
Catalysts for the stock include the deleveraging and/or restructuring of the group, including stake sale, divestment of assets, to reduce gearing.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-03-25

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