mm2 Asia (1B0) – FY19 Results

mm2 Asia (1B0) – Rising revenue but saddled with debt
Price: S$0.24
Market Cap: S$273.26M
Shares outstanding: 1,162.8M
Free Float 43.8% (509.3M shares)
PE: 14X
Yield: N.A
52W High: S$0.460
52W Low: S$0.220

Update post Full year 2019 results
FY19 revenue numbers surged 38.6% to S$266.2M due to full-year contribution from Cathay cinemas and higher sales from 39% owned UnUsUaL. However earnings were impacted by substantially higher financing expenses

FY19 reported profit was propped by a S$4M gain from other income, without which reported numbers would have been worse

A welcome sign was the breakdown on business segment revenue for FY19 vs FY18 results, showing improved EBITDA margins for cinema business, further restructuring may add S$1M-S$1.5M to FY20 EBITDA which will help with paying off financing expenses.

Core production revenue from SG and MY fell, partially offsetting gains in North Asia while 18 months core production pipeline going forward shows S$162M worth of contracts secured.

Past M&A activities have led to debt ballooning, we believe a re-rating of the company will only materialize on events which will lead to substantial deleveraging of balance sheet, returning to a light asset play. Past guidance/potential strategies have been to spin-off or divest cinema or other subsidiaries.

With projected numbers and financing expenses, a re-rating and return to former glory for its share price will be unlikely, therefore we will have to continue monitoring for any M&A which will brighten mm2 Asia’s outlook or potentially face a long & drawn out recovery.

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!

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

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

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) –
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%

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%

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

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?

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!