mm2 Asia (1B0) – Compelling Valuations after 40% share price slump in 2018

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mm2 Asia (1B0) – Compelling Valuations after 40% share price slump in 2018
Price: S$0.305
Market Cap: S$354.7M
Shares outstanding: 1,162.8M
Free Float 43.8% (509.3M shares)
PE: 13.11X
Est FY19 PE: 12.2X
Yield: N.A
52W High: S$0.545
52W Low: S$0.30

Introduction
mm2 Asia is one of Asia’s leading content producers and entertainment group.
A media content provider that produces movies and infotainment programs for television stations, advertisers and online media.
Key businesses include Content Production (Core), Post Production (Vividthree), Cinema Operations (Cathay) & Concerts Promotion & Production (UnUsUaL)

Core Production
mm2 derives core content revenues from contractual production of films/content, protecting its bread & butter from poor box office performance while ensuring good returns
Healthy pipeline of ~80 films and expansion into North Asia which will drive revenue as budgets are typically larger than SEA content
Beyond the chinese market, the Group is also seeking opportunities in regional film co-productions, as seen by projects:
1) Fox Networks Group Asia investment in 4 feature films by mm2 Entertainment
2) Netflix Original co-production – Triad Princess (Second original mandarin series) – www.netflix.com/triadprincess
3) Slate financing partnership with Korea’s CJ E&M

Post production (Vividthree)
3D animation, VFX, VR & Computer Generation Imagery (CGI)
Virtual reality IP (Train to busan)
51% acquired by mm2 in early 2015 for S$3M @ 3X PE

Events Production & Concert Promotion (UnUsUaL)
39.2% shareholding – recently sold 5.4% stake @ $0.465 to Brunei Prince (4.76%) & r3 Asset Management (0.64%)
Leading player in SG for live entertainment & concerts
48 “Disney on Ice” shows across South Korea
Walking with Dinosaurs – 117 shows across 11 cities (BBC Series)
Apollo 11 Moon Landing Exhibition – 153 shows in 3 years in North America w/ option for Rest of World
NPAT of S$10M for FY18

Cinema Operations (Cathay & Lotus)
Key playing in SG & MY
4th largest operator in Malaysia with 18 cinemas & 14% in terms of number of screens
Acquired Cathay Cineplex in SG for $230M (8 Cinemas, 64 screens & 12.2k seats)
Cathay has 39-40% of SG box office in 2015/16
Strategic acquisition acts as recurring earnings base, distribution platform & negotiating tool
Adjusted EBITDA of S16.66M for FY16 (Cathay)
Key cinema metrics like average ticket price & average F&B spending have showed progress
To maximize profitability, management has guided that they have been successful in increasing efficiency and lowering cost through various initiatives such as
1) Adding advertising slots before movies (Increase in advertising revenue at little cost)
2) Advertisement on pillars/surrounding
3) Garnering sponsorship to defray cost

*Golden Village Singapore stats (For information & comparison)
13 cinemas in SG
105 screens
For six months ended 30 June 2018
4.4M admission
Net Average ticket price S$10.6
Box Office receipts S$46.1M
6M Revenue HK$426.4M (~SG$76.7M)
6M Net Profit HK$69.6M (~SG$12.52M)
6M NPM 16.3%

Financials
1HFY19 Revenue $113.9M
1HFY19 Net Profit $14.6M (Affected by 1 off charge of S$1.6M in relation to Cathay Cinema purchase)
NP Margin 12.8%

FY18 Revenue $192M
FY18 NP $26.4M
NP Margin 13.75%

Ownership
Melvin Ang Wee Chye – 38.11%
Starhub – 9.83%
Benny Yeo Khee Seng – 8.19%
Fidelity – 1.96%

Management
Chairman – Melvin Ang (Former MD of Mediacorp Studios and Founder of mm2)
Group CEO – Chang Long Jong (Former Mediacorp Deputy CEO)
Group CFO – Chong How Kiat
CEO of Cinema Business – Hock Ong (Chief Corporate Development Office)

Key Catalyst
1) Company issued convertible notes of S$47.85 million @ 2% annual interest rate to partially finance the Cathay acquisition with a maturity date of the earlier of

A) an IPO of the cinema business (Conversion price would be @ 15% discount to IPO price)
B) third anniversary of the date of issuance of notes (7 February 2018)
There have been concerns raised by the market & investors of the debt overhang from purchasing Cathay and the drag on core margins by this heavy asset business, thus an IPO of the cinema business would reduce debt burden and prove a boon to mm2’s margins and be a key to unlocking value.

2) In June 2017, mm2 Asia successfully raised equity by way of placement @ S$0.57/share to raise ~S$20 million dollars, purpose of fund raising was for the intended purchase of a 50% stake in Golden Village Cinema Singapore for S$184.25M from Village Cinemas Australia, the deal eventually fell through when the other 50% shareholder Orange Sky Golden Harvest HK blocked mm2 Asia’s bid and bought the stake for S$175.8M

A good question to ask would be why did the market agree to fund mm2 @ S$0.57 a share to purchase a 50% stake in a cinema chain while pricing mm2 @ S$0.305 today when they have managed to acquire a 100% stake in a cinema where they will call ALL the shots in running the business?

IS the group any worse off by having total control over a legendary cinema franchise in Singapore over a 50% stake in a competing cinema chain?
What is the reason for the variance in perception for share price to slide 40% through 2018?

Conclusion
2QFY19 earnings were also impacted by a one off charge of S$1.6M relating to the cinema acquisition, the absence of such charge will also improve margins and bottom line.

mm2 Asia is slated to report 3Q19 results next month (Feb 2019) and we note second half results is usually seasonally stronger across all its business segments.

Post share price correction, mm2 Asia is trading at a PE of 13X and a discount to sector average of ~25-30X PE, purchases at current price levels may prove timely for investors to await for a positive change in market sentiment/perception.

4 Research analyst maintain an average target price of S$0.56 (Bloomberg data), representing a potential upside of ~83%

Disclaimer: THIS IS STRICTLY FOR GENERAL INFORMATION PURPOSES & should not be construed as a solicitation or offer to buy or sell any securities. Thank you!

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Union Gas Holdings IPO

Union Gas IPO
Price: $0.25
Market Cap: $50M
Shares Outstanding: 200M shares
PE: 12.6X
NAV: 5.46 cents/share
Forecast Yield: 6% (Policy to payout at least 50%  of net profits)

Listing on 19 July 2017, 3PM
Public Offering 17 July 2017
Public Tranche: 1.28M shares
Placement Tranche: 58.72M shares
Consisting of 30M new shares and 30M Vendor shares
Raising gross proceeds of $7.5M and net proceeds of approx. $5.72M

An established provider of fuel products in Singapore with over 40 years of operating track record. Currently, our business can be categorized into the following three (3) segments:

1. Retail LPG Business – we are engaged in the retail distribution of bottled LPG cylinders and sale of LPG-related accessories to mainly domestic households in Singapore;
2. CNG Business – we operate a fuel station at 50 Old Toh Tuck Road to produce, sell and distribute CNG primarily to NGVs and industrial customers for their commercial use; and
3. Diesel Business – in addition to CNG, since August 2015, we sell and distribute diesel to retail customers at our fuel station at 50 Old Toh Tuck Road. We are also engaged in the transport, distribution and bulk sale of diesel to commercial customers

Embarked on distribution of health products and household products to domestic households in Singapore since March 2016, complementing Retail LPG Business
Expansion through acquisitions, JV or alliances in SG or overseas

Strategy
Diversification into supply of piped natural gas to customers, obtain license on 17 April 2017 to supply to customers in services and manufacturing industries in SG
Acquisition of dealers

Risk
Dependent on UEC Group for supply of bottled LPG cylinders
Reliant on suppliers for supply of natural gas and diesel
Operates in highly competitive industry and face competition from existing market players and new entrants
Retail LPG business WILL be affected by redevelopment and rejuvenation of housing estates in SG, moving towards piped gas or electricity instead of cylinders

Key Concerns
Conflict of interest since UEC group that supplies gas is also owned by Teo Kiang Ang
Lack of transparency regarding gas transfer pricing and therefore difficult to forecast future numbers
Daughter of Teo, who is CEO does not own Union Gas but instead own 5% of UEC
CNG business is likely to die off, how will they find another revenue stream to replace it?

Ownership (Post IPO)
Teo Kiang Ang – 70%
Public – 30%

Financials

UGHFinancial HL
FY16 Revenue $35.7M
FY16 Net Profit $3.96M
FY16 NPM 11%

Issue Manager & Sponsor: CIMB

Underwriter & Placement Agent: CIMB
Disclaimer: THIS IS STRICTLY FOR GENERAL INFORMATION PURPOSES & should not be construed as a solicitation or offer to buy or sell any securities. Thank you!