Brokers' take: UOBKH starts coverage on mm2 Asia with 'buy', 9.8 S cents target price

AMID hopes that the pandemic-hit entertainment industry is set to recover, UOB Kay Hian (UOBKH) has initiated coverage on mm2 Asia with a 'buy' call.

In a Wednesday report, it cited that mm2 Asia is a "good proxy for the recovery" in activities including the resumption of concerts, while indicating a target price of 9.8 Singapore cents. Coupled with the normalisation of seating capacity in cinemas and a large slate of blockbusters in 2021, the media content provider could gain from industry recovery, said the research house.

UOBKH highlighted that mm2 Asia's core production business has a sizeable pipeline of content to be delivered in the near term. As a leading producer of Chinese film content and with an established track record of over 100 films under its belt, the pure content producer takes a lower risk in the film production process.

Analysts Lucas Teng and John Cheong said this is because the company earns production revenue of about 60 to 90 per cent of investor funds regardless of a film's box office success. Thus, mm2 Asia's film production business will be "fairly robust" so long as it has a volume backlog of larger production films. According to mm2 Asia, the company has 26 projects with a total project value of around S$99 million until FY2022.

A strengthening balance sheet also works in mm2 Asia's favour, said the research house. The group recently completed a rights issue of about S$54.7 million, which reduces net gearing to 0.8 time, from one time previously. This 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$47.9 million will be converted to equity in the listed cinema entity," the analysts added.

On an industry level, a "recovery play on concert resumption and blockbuster screening in theatres" will drive concert event production segment and point to a better-than-expected viability of the cinema industry, said UOBKH. Measures such as pre-event testing in live production venues and "long-awaited sequels" of Hollywood movies have encouraged box office revenues, the report added.

As a result, UOBKH expects concerts and event production to contribute to 19 per cent and the cinema business to contribute to 32 per cent of the revenue in FY2023.

Additionally, mm2 Asia could reap regional growth prospects given that it has seen increased revenue contribution from Greater China and Taiwan, where larger-scale productions have taken place.

Overall, UOBKH said it forecasts revenue to grow at an 89 per cent compound annual growth rate to S$219 million in FY2023 with major contributions from the resumption of concerts and increased cinema ticket sales. This is after factoring in that cinema ticket sales in FY2023 will be about 32 per cent lower than FY2019 levels, while concert shows will be 25 per cent lesser in FY2023 in relation to FY2019.

Shares of mm2 Asia closed down 4.1 per cent or 0.3 Singapore cent at S$0.07 on Wednesday.