October 9, 2019

Earnings growth will resume from 2Q20F after a lacklustre 1Q20 (PATMI -4.1% yoy), on a stronger pipeline by Unusual and post-production work. These, coupled with enhanced profitability of the cinema operations and more moderated growth in production budget, underpin our FY20- 22F topline and PATMI CAGR of 7.8% and 15.0%, respectively.

While mm2’s aggressive pursuit of acquisitions in the past has led to its high net gearing (0.85x as of end-1Q20), there seems to be no repayment issue with its net debt/EBITDA still within debt covenant ratios. Debt restructuring remains on the cards, which include possible monetisation of its stakes in the three subsidiaries that could raise at least S$20m-105m proceeds. Assuming all these go towards reducing borrowings, we estimate finance cost savings of S$1.2m-6.0m, which could boost our FY20F earnings by S$1.0m-4.6m and bring net gearing in the range of 0.4-0.7x.

Trade receivables and film intangibles have been on a rising trend in tandem with mm2’s increasing production topline and exposure to North Asia. Of the trade receivables which formed 2/3 of S$173m receivables as at end 1Q20, we estimate c.S$25m is related to the box office hit, More than Blue in China (global box office of US$153m). Film intangibles also rose as the group acquired new film rights and more film under production gets completed.

We lower our FY20-22F EPS by 4.9-9.6% to reflect a stronger Unusual pipeline but less aggressive growth assumptions for mm2’s core and post production segments. We maintain our Add call with a lower SOP-based Target Price of S$0.32. – CGS CIMB

Closing Price: S$0.23