MM2 ASIA LTD. (SGX:1B0)
mm2 Asia - Deleveraging Initiatives In Place
- Upgrade mm2 Asia to HOLD for positive initiatives to pare down debt.
- Catalysts in place now; pending execution of plans.
- Core business is improving, with more titles slated to be rolled out in FY22F.
- Deleveraging could reduce debt by over 50%.
Upgrade mm2 to HOLD on initiatives to reduce gearing while core business is improving
Positive developments to reduce gearing.
- We are upgrading mm2 Asia (SGX:1B0) to HOLD from FULLY VALUED, on the back of the positive developments that the group has embarked on recently, in a bid to pare down its debt that stood at S$264m as at end-September 2020, or 1.1x net gearing.
- The high gearing is one of the biggest concerns for mm2 Asia, besides the challenging environment due to the COVID-19 pandemic. These initiatives could pare down more than 50% of the debt at the group level. Hence, we could see a significant improvement in the balance sheet as well as profitability at the mm2 Asia group level.
Core business improving with strong project pipeline.
- mm2 Asia’s core business in content production and distribution has a strong pipeline of 26 projects valued at S$99m till FY22, higher than previous years. Financing has been secured for the bulk of these projects.
- With the increasing demand for more content by various streaming platforms in Asia, mm2 Asia targets to derive 40% of the content production revenue from streaming channels by FY22.
- UnUsUaL could see pent-up demand.
- We could see pent-up demand for out-of-home and live entertainment after the easing of COVID-19 lockdowns. Hence its 39%-owned UnUsUaL (SGX:1D1) could turn around once demand returns.
Proposals the group embarked recently include:
1) Spin-off and listing of the cinema business
- mm2 Asia is evaluating the feasibility of a possible spin-off and listing of the cinema business on the Catalist board of the SGX-ST. The proposed spin-off and listing, targeted for 3Q this year, will allow the cinema business to be financially independent from mm2 Asia and raise the funds required for its new growth opportunities without relying on the group for financing or financial support.
- mm2 Asia operates 151 screens across 20 locations in Malaysia under the brand “mmCineplexes”. In Singapore, following the acquisition of Cathay Cineplexes, the group became the second-largest cinema operator in Singapore, with 64 screens across eight locations under the brand "Cathay Cineplexes”.
A successful spin-off and listing of the cinema business would enable mm2 to turn around at a faster rate.
- Though the cinema business has helped mm2 Asia to build synergies across the entire value chain and to provide cashflow for its other business segments given that cinema operations are highly cash generative, we believe a successful spin-off is overall positive for the group. Gearing would hence be reduced. The absence of huge interest expenses would help to boost its bottomline.
- Furthermore, the cinema business was badly affected by the COVID-19 pandemic. The cinemas in Malaysia remained closed, though there were some indications that certain locations may be allowed to open but subject to restrictions. The Singapore ones are operating on a restricted capacity. In 1H21, revenue for the cinema segment plunged by 92.7% y-o-y to S$3.6m, and hence reported a huge loss. We expect losses to continue at least till 2HFY22/FY23F.
2) Merger of the cinema business with Golden Village cinemas in Singapore
- mm2 Asia has entered into a Heads of Agreement for the possible merger of its cinema business with Golden Village cinemas in Singapore, which is owned by Orange Sky Golden Harvest Entertainment (OSGH). Both parties will bring in one or more new investors to inject capital into the merged businesses.
- mm2 Asia operates eight cinemas in Singapore under the "Cathay" brand and 14 cinemas in Malaysia under the "Cathay Cineplexes Malaysia", "Mega Cinemas" and "Lotus Fivestar" brands, as well as a movie film distribution business and an online streaming business. OSGH has 14 cinemas in Singapore under the "Golden Village" brand.
- The details of the merger, including mm2 Asia’s stake in the merged entity, have not been finalised yet.
Need relevant parties’ approval, including CCCS, by end- 2021.
- The proposed merger is subject to the approvals of, among others, shareholders from both sides, the SGX-ST and HKSE, and also the approvals or rulings from the applicable governmental authorities, including the Competition and Consumer Commission of Singapore (CCCS) in relation to anti-trust issues.
- If the agreements or conditions for the proposed transaction cannot be satisfied or agreed by 31 December 2021, the Heads of Agreements will be terminated.
Proposals 1&2 to run in parallel.
- The proposed merger will run in parallel with the proposed spin-off and listing of the cinema business on the Catalist board. In the event that the IPO is completed successfully, mm2 Asia and OSGH will discuss in good faith the basis on which the merger would take place, taking into account the listed spin-off business.
Economies of scale from a larger and stronger cinema platform.
- The merged entity would be the largest cinema operator in Singapore and hence would provide advantageous economies of scale to the mm2 Cinema Business. A larger and stronger platform is also in a better position to fend off competition from online streaming platforms.
3) Launches rights issue to strengthen its financial position
- mm2 Asia has received an in-principle approval from the SGX for its proposed rights issue. The proposal involves the issuance of one rights share for every one existing share held, at S$0.047 for each rights share. The issue price is at a 60.8% discount to the last closing price on 1 Feb 2021.
- Upon the completion of the rights issue, expected to take place in the first week of April, mm2 Asia will receive net proceeds of S$52.2m, which will be mainly utilised to pay off the medium-term note due on 27 April 2021 (S$50m + 7% interest). The renounceable rights issue is fully underwritten by the lead manager, UOB Kay Hian (SGX:U10).
4) Entry of strategic investor
- On 7 Feb 21, mm2 Asia has received a non-binding term sheet from a Singapore private equity investor expressing interest in a potential acquisition involving taking a minority stake in one of the group's core businesses. The terms of this term sheet are still subject to finalisation.
Outlook and Strategy
Strong project pipeline with committed funds
- mm2 Asia’s core business in content production and distribution has a strong pipeline of 26 projects for films, television and online streaming, with total project value of about S$99m, to be completed by FY22. Financing has been secured for the bulk of these projects.
- The number of projects is also much higher compared to the typical 14 to 18 annual titles released in previous years.
- Furthermore, its main markets in North Asia, in particular China and Taiwan, also have a better control in terms of the COVID-19 situation, as compared to most other countries. China has already achieved up to 80% of pre-COVID-19 box office numbers.
- Additionally, for the distribution business, mm2 Asia has recently confirmed the interest of internationally renowned cinematic distributors and streaming services in distributing its content, valued at over US$15m and slated for release in 2021/2022.
New revenue driver from streaming
- mm2 Asia targets to derive 40% of the content production revenue from streaming channels by FY22. mm2 Asia is currently working with some of the leading platform owners. Leading platforms include Netflix, HBO GO, HBO Max, Hulu, Amazon Studios, iQIYI, Youku and Tencent.
- With the increasing demand for more content by various streaming platforms in Asia, the group targets to derive 40% of the content production revenue from streaming channels by FY22.
Target to pare down over 50% of debt at group level mm2 targets to reduce its debt by over 50% following the rights issue and cinema IPO.
- The bulk of the debts are currently at the group level. Post the cinema IPO, a portion would be converted to cinema equity and some of the debts could be transferred to the cinema entity. About S$54.7m convertible bonds are expected to be converted to cinema equity, while another estimated S$30m of debt could be transferred from the parent level to the standalone cinema entity. Hence, we could see a significant improvement in the balance sheet as well as profitability at the mm2 Asia group level.
Earnings and Recommendation
Initiatives in place to pare down debts.
- All these initiatives are mm2 Asia’s effort to pare down its debt, which stood at S$264m as at end-September 2020, or 1.1x net gearing. 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 debt level has been a drag to mm2 Asia’s balance sheet and the high interest costs has also affected its bottomline.
- The proceeds from the rights issue and the cash injection from the strategic investor provided a much-needed life buoy for mm2 Asia. With this, together with the cinema IPO, gearing can be expected to be reduced to 0.4x from 1.1x.
Catalysts in place now; pending execution of plans.
- We have been highlighting in our previous reports that catalysts for mm2 Asia include deleveraging and/or restructuring of the group, including stake sale and divestment of assets, to reduce gearing. The catalysts are in place now, pending the execution of the proposed plans.
Current share price already factored in the negatives.
- mm2 Asia's share price has tanked ~30% following the announcement of the 1-for-1 rights issue at S$0.047 per rights share, a 60.8% discount to the last closing price on 1 Feb 2021. We believe the current mm2 Asia's share price is at a depressed level and has already factored in the negative issues, including the high gearing concern, besides the damage caused by the COVID-19 pandemic to all its business segments – core production, cinemas, post production and live concert organiser, UnUsUaL.
Forecasts adjusted for rights issue.
- As the rights issue is fully underwritten and has already received the approval from the SGX, we have adjusted our numbers to take into consideration the rights issue. We have not factored in the proposed cinema IPO and the merger with Golden Village.
Upgrade mm2 Asia to HOLD with adjusted target price of S$0.089.
- With the positive initiatives in place, and the share price is already trading at depressed level, we upgrade mm2 Asia to HOLD from FULLY VALUED. Catalysts are in place now, pending the execution of the plans.
- Our sum-of-parts target price is now S$0.089, after adjusting for the rights issue and also higher valuation for the core production business.
- See mm2 Asia Share Price; mm2 Asia Target Price; mm2 Asia Analyst Reports; mm2 Asia Dividend History; mm2 Asia Announcements; mm2 Asia Latest News.
Lee Keng LING
DBS Group Research
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https://www.dbsvickers.com/
2021-02-19
SGX Stock
Analyst Report
0.089
DOWN
0.130
