• mm2 Asia's 1HFY20 results broadly in line, supported by event and post-production segments while core production and cinema were weaker. See mm2 Asia Announcements.
• Strong project pipeline for core production division, UnUsUaL and Vividthree.
• Limited upside to Target Price of S$0.30; downgrade to HOLD.
• Potential catalysts to deleverage include stake sale and divestment of assets.

Limited Near Term Upside to S$0.30 TP; Downgrade to HOLD

• Given the limited upside to Target Price after the recent 30% jump in share price, we downgrade the stock to HOLD. On a longer term basis, we continue to see value in mm2 Asia (SGX:1B0).
• Based on sum-of-the-parts valuation, and stripping out its stakes in UnUsUaL (SGX:1D1) and Vividthree (SGX:OMK), the market is valuing the core production and cinema segment at below S$200m, which works out to P/EBITDA of 3x, which is too low in our view. mm2 Asia paid 13.8x P/EBITDA for the Cathay cinema chain in Singapore and about 8-9x for the Malaysian cinemas while peers are trading at about 4.8x. The group has yet to realise the full synergistic benefits across its entire value chain.
• Near-term catalysts would include deleveraging and/or restructuring of the group, including stake sale, divestment of assets, to reduce gearing.

2QFY20 Results Broadly in Line

• The 5% y-o-y increase in revenue to S$68.4m (+40% q-o-q) was mainly contributed by associates UnUsUaL and Vividthree. This was partly offset by weaker core production segment, due to lower distribution income and fewer productions completed, as some of the projects were still ongoin.g at the end of the fiscal quarter.
• Revenue from the cinema segment is dependent on movie titles released. Gross profit margin stood at 40.9%, slightly lower than 42.5% in 2QFY19.
• Net profit of S$2.2m (-40% y-o-y, -68% q-o-q) accounted for 11% of our full-year forecast. Together with 1QFY20, mm2 Asia's 1HFY20 earnings accounted for 45% of our full-year estimates; broadly in line as 2H tends to be stronger than 1H.
• UnUsUaL recorded a strong revenue growth of 57.5% y-o-y to S$29.6m in 2QFY20, primarily attributed to the higher revenue contribution from the Promotion segment. In tandem with its revenue growth, net profit surged 54.8% to S$5.0m. See UnUsUaL Share Price; UnUsUaL Announcements.
• Vividthree posted higher y-o-y revenue and profit for 2QFY20, largely attributed to the completion of post-production works such as visual effects (VFX) and computer-generating imagery (CGI) for film producers. See Vividthree Share Price; Vividthree Announcements.

Strong Project Pipeline

• For the core production business, the group has about 80 projects in the pipeline for the next 18 months. UnUsUaL is inclined towards recording full-year growth with a robust line-up of concerts/theme shows.
• Vividthree sees further opportunities in adapting the Train to Busan (TTB) Intellectual Property rights for different show concepts/immersive attractions. It has also entered into a MOU to develop the Doraemon Experience (DE).

Cinema to Provide Leverage Synergies With Core Business

• The cinema segment continues to provide the group with a stable flow of revenue. It also enables the group to gain greater access to international studios that can lead to an increase in co-production opportunities and capabilities.

Limited Upside to Target Price of S$0.30 TP; Downgrade to HOLD

• No change in earnings forecasts, as 1H20 results were broadly in line. Our Target Price is tweaked to S$0.30 (prev S$0.29), which is derived from sum-of-parts valuation, on higher UnUsUaL valuation based on current market capitalisation. See mm2 Asia Share Price; mm2 Asia Target Price.
• Given the limited upside to Target Price after the recent 30% jump in price, we downgrade mm2 Asia to HOLD.
• Potential Catalysts: The deleveraging and/or restructuring of the group, including stake sale and divestment of assets.

Where We Differ

• We value the production segment based on a lower PE multiple, and P/EBITDA for the cinema. For UnUsUaL and Vividthree, we value them at current market valuations.

Source: DBS Research - 15 Nov 2019