• mm2 Asia's FY19 revenue in line; net profit slightly above.
• Growth across all business segments.
• Tweaked earnings by 1-3%.
• Negatives priced in; upgrade to BUY with revised Target Price of S$0.34.

Value Emerging; Upgrade to BUY

• mm2's share price has shed 27% since our downgrade to HOLD after the release of 3QFY19 results in February. At current level, we see value emerging.
• Based on sum of the parts valuation, and stripping out its stakes in UNUSUAL LIMITED (SGX:1D1) and VIVIDTHREE HOLDINGS LTD. (SGX:OMK), the market is valuing the core production and cinema segment at only S$144m, which works out to P/EBITDA of slightly over 2x, which is too low in our view. mm2 Asia paid 13.8x for the Cathay cinema chain in Singapore and about 8-9x for the Malaysia cinemas while peers are trading at about 5.5x P/EBITDA.
• Though MM2 ASIA LTD. (SGX:1B0) still needs to deleverage given the swing to 0.8x net gearing at end-FY19 and high interest expense, we believe the negatives are already priced in. We see value emerging at the current level with 43% upside to our revised Target Price of S$0.34.
• Upgrade to BUY.

Where We Differ

• Slight difference in valuation peg vs consensus. We value the production segment based on PE and P/EBITDA for the cinema. For UnUsUaL and Vividthree, we value these at current market valuation, vs PE valuation used by consensus.

Potential Catalyst

• More projects especially in North Asia; successful cinema operation spinoff.

Valuation

• Upgrade to BUY, Target Price S$0.34.
• Our sum-of-parts target price of S$0.34 is pegged to 16x FY20F earnings for core business, in line with peers listed in Asia, 5.5x P/EBITDA for cinema business, and current market valuation for UnUsUaL and Vividthree.

Key Risks to Our View

• No long-term financing arrangements for productions. The commencement of each production is dependent on mm2 Asia’s ability to secure funding.
• Unavailability of good scripts. Lack of good scripts for uction may lead to less support from stakeholders.

What's New - FY19 Earnings Slightly Above Expectations; All Segments Registered Growth

FY19 revenue in line; net profit slightly above.

• Total revenue for FY19 surged 39% y-o-y to S$266.2m, mainly driven by the full year contribution for Cathay cinema, vs four-month contribution in FY18; in line with our forecast. Net earnings of S$19.1m (-14% y-o-y) is slightly above our expectation of S$16.8m on better margins.

Slight improvement in gross margin; net margin hit by interest cost.

• Gross margin for the group of 46.7% was slightly higher than 45.5% in FY18. Net margin of 7.2% saw a steep drop from 11.7% in FY18, as the Group took on more debt, mainly to fund the acquisition of Cathay cinemas in Singapore.

All business segments registered growth.

• For the core production segment, revenue grew 6% y-o-y, partly attributable to the blockbuster movie, “More than Blue”.
• Revenue for the Cinema segment surged 124% y-o-y, mainly driven by the full year contribution for Cathay cinemas, vs four-month contribution in FY18.
• Both UnUsUaL and Vividthree did well, on revenue gains of 23% and 47% respectively.
• In terms of geographical breakdown, Singapore accounted for almost 50% of the total group revenue. For the core production segment, revenue from North Asia accounted for 70% vs 57% in FY18, in line with our expectations of higher contribution from North Asia.

Outlook and Strategy

Platform business (Cinema) and core production unit

• mm2 Asia continues to enter into slate deals to co-produce high quality digital and live content with international content distributors in North Asia especially, and also in other regions like Korea. In FY2019 to date, the group has won several awards for its films.

UnUsUaL – Healthy project pipeline

• UnUsUaL has a visible project pipeline for the next one to three years. For live concerts, UnUsUaL has already lined up its artistes in various locations including Singapore, China, Hong Kong, Malaysia, Bangkok and Jakarta.
• The family entertainment shows, which have a wider target audience reach, provide even greater visibility. “Disney on Ice”, which was already launched last year, will continue its tour for the second half of this year. “Walking with Dinosaurs” will have 117 shows in 11 cities starting from August 2019. “Apollo” has scheduled a 3-year tour in North America from mid-2019.

Vividthree – Riding on the momentum of TTB

• Following the completion of the flagship Train to Busan VR (TTB VR) tour set in Beijing, the next destination is Xiamen. Vividthree has granted a local promoter a 1-year exclusive territorial right to host the TTB VR tour in the province. The sequel to TTB, slated for release in 2020, should help to keep up the momentum. Outside TTB, Vividthree is also exploring new intellectual property products to expand its business.

Source: DBS Research - 31 May 2019