MM2 Asia: From STARDUST to STARDOM





02.09.2019





INVESTMENT OPTI-MAXIMTM

  1. Stock is undervalued at 0.189 cents, 100% discount to a conservative fair value of $0.33
  2. Recent sell-off was a result of the negativity from cinema operations
  3. Likely spin-off the cinema business
  4. Potential management buy-out could portend to substantial upside




As of 30 August 2019



OPTIMAX OCTAGON RATING MATRIX SYSTEMTM





NOTE: Optimax Octagon Rating Matrix SystemTM is a proprietary rating system owned by the Optimax Investment & Asset Management Pte Ltd which provides 1-8 rating to the equities and asset classes the company provides investment keynote and media coverage on. All copyrights and intellectual property rights of the system is exclusively reserved.



OPTI-STARTM : MM2 Asia


MM2 Asia, home-grown content production and distribution house, was the creative media powerhouse which had caught Singaporeans by storm in the early 1990s. MM2Asia has evolved from movie production house for film, TV and online content production, distribution and sponsorship into an integrated media group across the content, immersive media, cinema, event and concert industries in Singapore, Malaysia, Hong Kong, Taiwan, China and the United States of America.


FY2019 was a year of many ‘firsts’. The Group recorded revenue of S$266.2 million, an increase of $74.2 million or 38.6% million in the financial year ended 31 March 2018. This is an all time high for the past 5 years. Furthermore, they had their first remake of a movie that smashed box office records across key markets in Asia. Not only did they win their first Golden Leopard at the 71st Locarno Film Festival, the Group had its first foray into immersive virtual reality in China. They had its first full year of operating cinemas in Singapore. Just to mention a few notable ones.





SHARE PRICE SNAPSHOT


Its recent share price has fallen short of its all-time high of $0.64 to a measly $0.188 as at 26 August 2019.This is a massive 70.6% slump since its peak in June 2017.


In the YTD, MM2 ‘s share price performance slid a further 41.3% from its 2018 close of $0.32. We believe that at current prices, MM2 Asia presents a substantial value proposition to investors and could thus be a value-buy based on a sum-of-the-parts valuation





OPTI- ANALY$I$TM


Inverted Share Price versus Topline Growth


We observed an interesting share price discrepancy anomaly, given the healthy topline and bottomline growth for the past 5 years. The CAGR for the 5 years ranging from 2015-2019 is 81.9% for revenue, 89.7% for gross profit and 39.1% for net profit respectively.









Share Price Affected by Cinema Business?


We venture to attribute MM2’s woes of weak market sentiments due to the botched acquisition of a 50% stake in local cinema-chain Golden Village (GV). The strategy then had been to acquire movie cinema screens for it to distribute movies. This would provide it with the channels to showcase both internationally acclaimed films like The Avengers as well as to serve as a stage for budding local films such as Ah Boys to Men.


Subsequently, management proceeded with a separate deal to acquire Cathay Cineplexes for $230 million. While this would give them 100% control over the chain, the number of screens was substantially lower. Cathay currently has 64 screens across 8 locations, while GV has 113 screens across 14 cinemas.


The upfront capex investment for the cinema acquisition has loaded the balance sheet with high gearing ratio which weighs on the investors’ sentiments.


FORWARD GROWTH Impact of Cinema Business


Notwithstanding, the cinema business continued to be a key proposition for MM2 as the group ventured downstream to ultimately capture eyeballs. Over the past 2 years, the cinema business has yielded 250% leap in revenue growth from S$45.0m to S$100.7m.


At a recent Q22019 earnings briefing, Mr Hock Ong, Chief Corporate Development Officer, MM2 Asia & Chief Executive Officer of mm Connect (mm2 Asia’s cinema business), elaborated that the cinema business gave an overall positive update on operations. Mr Hock was quoted as saying that ever since MM2 took over the cinema business, operational efficiencies have been improved and operating cash flows are positive and able to cover overall debt levels.





Expanding Revenue Base from New Overseas Markets


Apart from the stable 46% revenue contribution from the Singapore home market, the encouraging positive growth from Hong Kong, Taiwan and Others markets is marginally offset by the decline in revenue contribution from the operations in China and Malaysia.


The healthy 50% to 50% revenue stream from both Singapore and overseas operations belies a mature revenue model which augurs good balance and market composition which is sustainable.





Rising DEBT-to-EQUITY Ratio


For sure, MM2 had undertaken on a large amount of debt to finance the cinema acquisition and net gearing did rise from 0.28 in April 2017 to 0.61 in Mar 2019.

However, on an interest coverage ratio basis, a measure (EBIT/Interest expense) of how much a company is able to cover its interest payments with earnings, continues to be strong at 3.3x, meaning to say that the company’s earnings can cover more than a tripling of its current interest payments.


Likely New Business Spin-off


In addition, management’s communication to investors imply that the group is looking to spin-off the cinema business and alleviate any concerns about value destruction. As a cash flow-generative business, we opine that such a move, should it precipitate in end-2020, should be positive for MM2’s share price.


Based on a track record from the UnUsUaL and Vividthree listing, the current management team has had substantial experience in managing spin-off of new businesses.


Assuming MM2 values its current cinema operations at book value and its remaining stakes in non-listed entities are taken at book value, we opine that there is a potential 100% upside from current prices. Our massively conservative value of $0.38 belies the synergistic relationships between its core, events and cinema businesses.


OPTI-VALUETM


In terms of forward P/E, valuations continue to be undemanding, with MM2 trading at only 10.4x FY20E P/E versus the STI’s forward P/E of 12.5x (FY19E) and 11.8x (FY20E).


Notwithstanding, a potential management buyout at current prices, we believe that MM2 presents a clear and present value proposition counter for investors.


Meanwhile, the street continues to be bullish on the counter, with 2 Buys and 1 Hold and an average target price of $0.29.







CONTACT US:

WIN@optimax-investment.com