INITIATE COVERAGE $0.098 !

 

MM2 Asia (MM2 SP) 

 

BUY | Price/Tgt: S$0.069/S$0.098 | Mkt Cap: S$160.5m

 

Singing To A Blockbuster Recovery

 

mm2 Asia is a media player with film production, cinema, post production and concerts/events production businesses. 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. Its core film business has produced award-winning films. Initiate coverage with BUY. Target price: S$0.098, 42% upside.

· Core production business with sizeable pipeline to be delivered in the near term along with regional growth prospects. mm2 Asia (mm2) is a leading producer of Chinese content in the film industry. The group has an established track record, producing over 100 films since 2008. 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&rsquo s box office success. As such, mm2&rsquo s film production is fairly robust as long as it has a volume backlog of larger production films. According to mm2, it has 26 projects with a total project value of about S$99m until FY22.

· Recovery play on concert resumption, blockbuster screening in theatres. Concerts and live events have been hard hit by the pandemic. mm2&rsquo s concert and event production segment had one production show in 1HFY21 (81 in FY20) and six promotion shows in 1HFY21 (47 in FY20). A path back to recovery appears to be in place. At designated venues in Singapore, up to 750 attendees are allowed if pre-event testing is implemented. As for the cinema busines, audiences have been returning to theatres with a higher allowable seating capacity. There is also a bumper slate of Hollywood blockbuster films in 2021, which includes long-awaited sequels such as The Matrix 4. While online streaming of films has become more commonplace, recent theatrical releases in the post-circuit breaker period have seen encouraging box office revenues (eg Godzilla vs Kong). This could point to a better-than-expected viability of the cinema business. 

· Strengthening balance sheet. The group has recently completed a rights issue of approximately S$54.7m which reduces net gearing to approximately 0.8x (vs 1.0x previously) and enables interest savings with the repayment of a medium-term note. There is also a possible spin-off for the cinema business, in which convertible bonds of S$47.9m will be converted to equity in the listed cinema entity. If the cinema IPO materialises, this will further reduce the group&rsquo s net debt level to 0.4x. 

· Initiate coverage with BUY and sum-of-the-parts (SOTP) target price of S$0.098. mm2 is trading at 0.6x book value and an inexpensive 6x FY20 earnings (pre-COVID-19 levels). Concerns over its cinema business could be slowly lifted with: a) improved seating capacity, b) a potential spin-off, and c) a potential merger with Golden Village, while the overhang from its high debt levels has also been addressed.