Film production company and cinema operator mm2 Asia is reaching an inflection point with strong recovery ahead, writes UOB Kay Hian Research, which is keeping a &ldquo buy&rdquo call but with a higher target price of 11.5 cents, from 9.5 cents previously.

 

In a Feb 14 note, analysts at the brokerage expect earnings to post a sharp recovery from FY2022 onwards, driven by all three segments.

 

&ldquo Cinema attendance is expected to recover as the majority of Singapore&rsquo s and Malaysia&rsquo s populations are vaccinated, a robust pipeline of core production business of $150 million to $190 million in the next two to three years, and resumption of in-person concerts,&rdquo the analysts write.

Last year, mm2 Asia reported a FY2021 ended March 31, 2021 core net loss (excluding impairments and other fair value loss) of $44.3 million.

Cinema business

 

The company&rsquo s cinema business, Cathay Cineplexes, is now &ldquo better positioned for recovery&rdquo , thanks to a combination of a strong 2022 strong line-up of blockbuster movies including highly anticipated Marvel movies such as Doctor Strange in the Multiverse of Madness, Thor: Love and Thunder and Black Panther: Wakanda Forever. 

 

According to Cathay, Spider-Man: No Way Home, which was released in December 2021, was the highest grossing film in Singapore for 2021 with its $10 million revenue haul coming close to Avengers: Endgame&rsquo s pre-pandemic haul, which, according to the analysts, is &ldquo impressive&rdquo given how cinema halls are capped at just 50% capacity and with a running time of just two weeks.

 

Going forward, domestic cinema attendance is poised for recovery as 93% of Singapore&rsquo s population is fully vaccinated with 60% having taken the booster shot and close to 80% of Malaysia&rsquo s population is fully vaccinated. 

 

Cinemas in Singapore and Malaysia have been allowed to reopen since 2H2021, albeit at a lower capacity. Singapore&rsquo s authorities have allowed 1,000 pax per cinema hall with a 1-metre safe distancing rule between different groups while Malaysia&rsquo s cinemas are allowed to operate at 50% capacity. Additional revenue upside from food and drinks sales will help bring back &ldquo a large and vital&rdquo contributor to the topline, says the analysts.

 

They add: &ldquo Compared to global peers, we expect mm2 Asia to follow suit and experience a sharp recovery in earnings. AMC Entertainment, one of the largest US cinema chains, has turned EBITDA positive on the back of easing restrictions since 1Q2021. Closer to home, IMAX China recovered strongly as 90% of its theatres have reopened in 1H2020, with 2H2021 expected to outperform y-o-y, according to the company.&rdquo

 

Last year, mm2 Asia planned to sell 80% its cinema business to Kingsmead Properties for $84.8 million, with the sale due Dec 31, 2021. However, the deal fell through and Kingsmead has instead exercised its rights to convert its $6 million deposit into 75 million mm2 Asia shares at 8 cents each.

 

Even so, mm2 Asia is still exploring other ongoing options that include an IPO of the cinema business sometime in 2HFY2022. &ldquo Assuming mm2 Asia sells more than 50% of Cathay, a spinoff listing would help mm2 restructure its debt as almost all of mm2&rsquo s debt would be tagged to Cathay once it becomes an associate company,&rdquo writes UOB Kay Hian Research.

 

mm2 Asia has appointed United Overseas Bank Limited and other professional advisers to advise on the proposed spinoff and listing.

Core film production business

 

In addition, UOB Kay Hian Research sees a robust pipeline for mm2 Asia&rsquo s core film production business, with projects amounting between $150 million to $190 million over the next two to three years.

 

&ldquo Currently, the group has over 30 projects that are in various stages of development, production and distribution. As production of films and television series ramps up in FY2022, mm2 Asia is set to produce and distribute highly anticipated titles in new and existing markets,&rdquo writes the analysts. 

See also: Ron Sim signals growing interest in media business with mm2 Asia and GHY stakes

 

Some titles include Ah Girls Go Army, which raked in $1 million in ticket sales in three days with a sequel already confirmed. &ldquo Also, we believe that the group&rsquo s track record in quality production will see its core production business sought by streaming channels, with the release of its highly anticipated More Than Blue series well-received on Netflix. We expect FY2022 revenue and EBITDA from the core business to grow by 37.4% y-o-y and 15.9% y-o-y respectively,&rdquo writes UOB Kay Hian Research.

Concert production business

 

After a lengthy hiatus, in-person concerts and shows have resumed as more countries gradually ease restrictions, which will lift mm2&rsquo s separately-listed concert production subsidiary UnUsUaL Entertainment. In 1HFY2022, Unusual co-produced 59 in-person shows for circus act La Clique and 29 shows for local act Boom Boom Room Live!. 

 

Also, Unusual, which is more than 75%-held by mm2, produced two sold-out in-person JJ Lin concerts, indicating pent up demand for concerts. 

 

In a recent announcement, Unusual is set to co-produce 54 concerts across 54 Chinese cities for singers Angela Zhang and Kelly Yu. 

 

Hence, UOB Kay Hian Research expects FY2022 EBITDA to break even. 

 

New frontiers

 

Aside from its current business units, mm2 Asia is entering the metaverse, notes analysts. mm2 Asia has plans to launch an online NFT marketplace, named Metaviva, for digital assets focusing on popular regional media content. 

 

&ldquo As a comparison, the global OpenSea NFT marketplace currently boasts a valuation of US$13.3 billion. Theoretically, Metaviva&rsquo s potential valuation would be sizable, depending on the success of its launch,&rdquo writes analysts.

 

Overall, UOB Kay Hian Research adjusts PATMI forecasts for FY2022-2024 on the back of a recovery for all segments, easing restrictions and a favourable outlook. The analysts forecast FY2022 loss of $5.9 million, followed by earnings of $12.0 million in FY2023 and $22.1 million in FY2024, which will mark a full recovery to pre-Covid-19 levels.