mm2 Asia - DBS Research 2020-06-01: Expect Another Year Of Weakness

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

mm2 Asia - Expect Another Year Of Weakness

  • mm2 Asia's FY20 PATMI plunged 81.5%, impacted by COVID-19, way below expectations.
  • Expect gradual resumption of activities; Concert & Events and Cinema operations at half strength.
  • FY21F to remain weak; expect recovery in FY22F.
  • Maintain FULLY VALUED with Target Price of S$0.14, based on sum of parts valuation.

A weak set of FY20 results, hit by COVID-19

  • mm2 Asia (SGX:1B0)'s FY20 results way below expectations. Group revenue was down 11.4% y-o-y to S$235.8m. All segments - Core business, Cinema and Post-production (Vividthree (SGX:OMK)) - saw a decline in revenue except Concerts & Events (UnUsUaL (SGX:1D1)) division.
  • The operations of Core business and Post-production segment in North Asia and Southeast Asia have been disrupted during 4Q FY2020 by the movement restrictions due to COVID-19. Consequently, the release of various project titles and tour shows have been rescheduled. Cinema operations in Malaysia and Singapore were also forced to temporarily cease operations during the lockdown period.
  • mm2 Asia's gross profit for FY20 declined 28% y-o-y to S$89.4m, with gross margin falling to 37.9% from 46.7% in FY19. Coupled with an impairment loss on goodwill of S$10.7m (S$3.7m in Malaysia and S$7m in Singapore) in view of the negative impact of COVID-19 on the cinema operations, and partly offset by other gains including forex, PATMI plunged 81.5% y-o-y to S$3.5m, way below expectations.

Gearing remains high at 0.9x.

  • mm2 Asia managed to obtain a repayment deferment of $15.5m as its businesses were affected by the COVID-19 in 4Q FY20. Gearing remains high, at 0.9x. Out of the total debt of S$257.8m as at FY Mar 2020, S$127.1m is due within one year.

Core business continues to be a key driver.

  • We expect a resumption of production projects, likely by September. The Group’s core business in content development will continue to be a key driver, with its diversified businesses, including distribution of content to platform providers, and multi-market presence to help mitigate the impact on other group businesses that have been more adversely affected by COVID-19.
  • mm2 Asia’s strategy remains focused on North Asia.

Concert & Events Business – UnUsUaL partial resumption likely in September.

  • The Group foresees a pent-up demand for out-of-home and live entertainment after COVID-19 lockdowns ease. China is expected to resume operations in September, and Singapore in November. However, given the safe distancing measures that is likely to be still in place, concerts may only be allowed to run at 50% capacity.

Cinema business – expect to be still loss making in 1H FY21F.

  • We expected the cinema segment to be in the red for 1H FY21F, and to resume operation in September at half strength. But there could also be pent-up demand once the lockdowns ease. Furthermore, since the beginning of COVID- 19, a strong pipeline of Hollywood and Asian movies has accumulated to be released.

FY21F to remain weak; recovery in FY22F.

  • Our assumptions include a gradual improvement in the fight against COVID-19 from 2H FY21F onwards (September 2020) and a recovery in FY22F. So far, mm2 Asia has not experienced any cancellation in projects as a result of the pandemic situation.
  • We also expect mm2 Asia to benefit from more government support packages to help to cushion the impact.

Maintain FULLY VALUED with Target Price of S$0.14, based on sum of parts valuation.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-06-01