Brokers' take

mm2 Asia | Add Target price: S$0.72 June 5 close: S$0.48 CGS-CIMB, June 4

mm2 posted S$192 million revenue (+101 per cent) in FY18, driven by broad-based growth across all its four segments. This offsets higher admin costs and results in higher core net profit of S$26.4 million (+39 per cent year-on-year). We deem FY18 core net profit to be in line, though 4 per cent above our FY18 forecast, as Q4 is a seasonally stronger quarter, forming 35 per cent of our and consensus full-year numbers.

mm2's core production business recorded 65 per cent topline growth in FY18, of which North Asia now accounts for 57 per cent of total production revenue, versus 46 per cent in FY17. Its recent three-year financing partnership with CJ E&M also underscores mm2's capability and expanding network in the South-east Asian film market. Meanwhile, we expect full-year contribution from its Cathay acquisition, better box office performance and improving cost synergies to drive FY19 growth for cinema operations.

Apart from a S$50 million medium-term note and S$47.85 million convertible debt securities, mm2 has also entered into a S$115 million term loan facility, which we think could ease investors' concerns on financing the S$230 million acquisition of Cathay cinemas. We expect net gearing ratio to hike to 0.7 times in FY19, from net cash position as at end-FY18, with overall borrowing costs of 4.5 per cent on average. Management remains on the lookout for synergistic opportunities in return for market share gains in the exhibition business.

Sembcorp Industries | Buy Fair value: S$4.50 June 5 close: S$2.99 DBS Group Research, June 4

Sembcorp has reached agreement to acquire UK Power Reserve (UKPR) - the UK's largest flexible distributed energy generator - for £216 million (S$385 million). The sellers are private equity investors Inflexion and Equistone (each holding 42.5 per cent stake) and UKPR's management (with a 15 per cent stake).

The acquisition strengthens Sembcorp's presence in the UK utilities space and is in line with the group's revamped policy to rebalance its energy portfolio towards developed markets.

Valuations look reasonable. In terms of price-to-earnings, we use S$26.7 million as the adjusted trailing net profit which translates to 14.4 times trailing P/E multiple. This is slightly lower than Sembcorp's own FY17 P/E multiple of around 14.9x, and given the growth prospects at UKPR, the deal is definitely earnings accretive to Sembcorp.

Compiled by Lee Meixian

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