UOB Kay Hian Research is initiating coverage on media content provider mm2 Asia as cinemas and concerts prepare for a “blockbuster recovery” in Singapore.
In an Apr 27 note, UOB Kay Hian Research analysts Lucas Teng and John Cheong initiate with “buy”, along with a target price of 9.8 cents, representing a 42.0% upside.
“Hard hit by the Covid-19 pandemic, the group is a good proxy for the recovery in activities, including the resumption of concerts/events and normalisation of seating capacity in cinema theatres with a bumper slate of blockbusters in 2021,” write Teng and Cheong.
mm2 Asia is a leading producer of Chinese content in the film industry. The group has an established track record, producing over 100 films since 2008. The company produces movies and infotainment programmes for TV stations, advertisers and online media. mm2 also finances, produces and distributes commercial content.
The company’s core production business has a sizeable pipeline to be delivered in the near term along with regional growth prospects, say Teng and Cheong. According to mm2, it has 26 projects with a total project value of about $99 million until FY2022.
See: Patience needed before silver screen shines again, says Melvin Ang of mm2 Asia
“As a pure content producer, mm2 takes a lower risk in the film production process, earning production revenue (60-90% of investor funds) regardless of a film’s box office success. As such, mm2’s film production is fairly robust as long as it has a volume backlog of larger production films,” write the analysts.
Earlier in April, mm2 Asia completed a rights issue of approximately $54.7 million which reduces net gearing to approximately 0.8x (compared to 1.0x previously) and enables interest savings with the repayment of a medium-term note.
The renounceable rights issue was fully underwritten by UOB Kay Hian.
See also: Buffeted by cinema closures, mm2 Asia reducing gearing with corporate actions: analysts
There is also a possible spin-off for the cinema business, in which convertible bonds of $47.9 million will be converted to equity in the listed cinema entity. In addition, there will be a downstreaming of about $20 million to $30 million in parent-level debt to the standalone cinema entity, which provides further cost savings and debt reduction for mm2. If the cinema IPO materialises, this will further reduce the group’s net debt level to 0.4x.
On its concert and live event front, mm2 had one production show in 1HFY2021 (compared to 81 in FY2020) and six promotion shows in 1HFY2021 (47 in FY2020). Looking ahead, a path back to recovery appears to be in place, say Teng and Chong.
At designated venues in Singapore, up to 750 attendees are allowed if pre-event testing is implemented.
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As for the cinema business, audiences have been returning to theatres with a higher allowable seating capacity. There is also a bumper slate of Hollywood blockbuster films in 2021, say the analysts. “While online streaming of films has become more commonplace, recent theatrical releases in the post-circuit breaker period have seen encouraging box office revenues. This could point to a better-than-expected viability of the cinema business.”
Teng and Cheong say UOB Kay Hian Research’s target price is based on a sum-of-the-parts valuation. The factors considered are: a) the company’s film production business at 7x enterprise multiple (EV/EBITDA), at a discount to larger-sized peers; b) cinema business at 7x EV/EBITDA, at a discount to larger-sized peers; c) subsidiaries UnUsUaL Limited and Vividthree Productions valued at market price; and d) 30% conglomerate discount.
“Locally-listed GHY Culture & Media Holdings (GHY) is similarly engaged in media production, but is mainly involved in drama series production and does not have a cinema business segment. As such, we have included GHY in our peer comparison only for illustrative purposes.”
See also: DBS starts GHY Culture & Media Holding at 'buy', deems it a 'healthy rising star'
As at 3.08pm, shares in mm2 Asia are trading 0.3 cents lower, or 4.11% down, at 7 cents.
