Non-operational Items Cut Target Price by 17%. Maintain BUY

• MM2 ASIA LTD. (SGX:1B0)’s higher than expected finance charges and tax rate related to its acquisition of Cathay Cineleisure led us to cut our 2019-21E core profit forecasts by 48%/12%/9%. 9MFY19 core profit was below expectations at 34% of our FY19E and 67% of previous consensus forecasts.
• We make no changes to our operational assumptions as mm2 Asia generates the bulk of its revenues and profitability from the core movie/TV production business in the 4Q (end-Mar). Our 1x PEG based Target Price is cut by 17% to SGD0.34.
• Failure to show cinema business value creation, or a slowdown in the production business, are the key risks to our outlook.

Effectively Working for Creditors

• We clarified with management that unlike 2QFY19, the drag in 3QFY19 profitability from finance charges did not involve any one-off items. The bulk of the SGD4m charge in the quarter relates to non-cash interest provisions for the future unwinding cost and interest cost of the convertible bond for the Cathay acquisition.
• Our profit downgrades are driven primarily by finance charges and by a higher effective tax rate as the non-cash provisions are not tax deductible.
• If management conducts a potential listing of its cinema business, the provisions would likely be reversed.

Cinema Transparency and Progress Is Paramount

• Movie/TV production and cinema business quarterly revenue and EBIT breakdown has so far been absent which makes any gauge about how these business segments are doing difficult. We expect to see these reported in the next quarter and see this as a key step towards transparency and regaining the market’s confidence.
• Overall, 9MFY19 EBIT met 76% of our FY19 and hence we have not revised our operational forecasts.

Encouraging Headlines Drive Bottom Line Impact

• The production businesses for TV/movie and event/concert have reported numerous new contracts and relationship wins over the past months and we take this as evidence of an improving order book in both volume and quality. These should translate to the healthy 18% core profit CAGR we forecast over FY18-21E.

Source: Maybank Kim Eng Research - 20 Feb 2019