mm2 Asia: Overindulging can lead to indigestion

SHARES of local movie producer mm2 Asia have marched south ever since it failed in an attempt to buy 50 per cent of Golden Village's Singapore cinema business and acquired Cathay Cineplexes' Singapore operations instead.

So when mm2 said last week that it had brought in the script doctors and will undertake a strategic review to enhance shareholder value, the stock perked up a little, closing at S$0.375 on Monday.

The company said it wants to lift its corporate profile in North Asia, and explore the possibility of a foreign listing of some of its key assets, which could include its cinema operations. mm2 has also appointed Chinese brokerage Haitong Securities as its financial adviser.

But these aren't new ideas that mm2 has floated. Management has always emphasised China expansion when pitching mm2 as a growth stock.

Plans for an initial public offering (IPO) of the Singapore and Malaysia cineplexes have been on the table since February, when Cathay was paid for in part by the issuance of convertible notes in MM Connect (which holds mm2's cinema assets), that will be redeemed in three years or on the day of its IPO, whichever is sooner.

What mm2 hasn't explained is how it intends to spin off its cinemas in a way that will raise its profile, when Cathay's not-so-splendid performance is widely perceived to be responsible for its flopping share price.

When the Cathay acquisition was completed on Nov 24 last year, the premise was that running more movie houses is a great cash business that nicely complements the lumpy earnings from mm2's core business.

mm2 doesn't provide segmental reporting on a quarterly basis, but in the 12 months ended March 31, adjusted ebitda (earnings before interest, tax, depreciation and amortisation) for the cinema business worked out to S$5.5 million on revenue of S$45 million, or an ebitda margin of 12.3 per cent.

So in fact, the cinemas didn't generate cash in an efficient way for mm2, which had a higher group ebitda margin of 33.4 per cent in the same period. In this age of "Netflix and chill", cinemas also lack a structural growth story. Cinema attendance and box-office takings in Singapore have declined since 2015, though attendance is known to fluctuate depending on the number of blockbusters screened each year.

Indeed, in the first half of this year, islandwide box-office receipts slipped 11 per cent to S$98 million due to a lack of record-breaking blockbusters.

For Cathay, employee and cinema hall operating lease commitments are inescapable (the sale terms required that mm2 retain Cathay's employees). Nevertheless, mm2 has told analysts it wants to sell three times as much popcorn, soft drinks and snacks, to help it hit a 20 per cent ebitda margin.

mm2 added that improving metrics for cinema will be more evident in six to nine months, Maybank Kim Eng analyst Luis Hilado wrote last month. Meeting this target is crucial if mm2 wants to prove it has a business worth buying.

Rival Golden Village (GV), which dominates the cinema circuit here, has a consistent ebitda margin of more than 20 per cent. It continued to outperform the overall Singapore market, growing market share to 47.2 as at end-June.

GV, which belongs to Hong Kong-listed Orange Sky Golden Harvest Entertainment, has also been trying out new ways to improve utilisation. GV Suntec City turns its Gold Class theatre into a "Zen Zone" during the weekday lunch hour for tired office workers to take a S$10 power nap.

The S$230 million payment for Cathay Cineplexes has also swung mm2 from a net cash to a net debt position and added S$205.7 million in goodwill to its books.

Some members of the audience are concerned that mm2 risks falling into the trap of forgoing earnings sustainability to grow at all costs.

Wisely, executive chairman Melvin Ang who in February spoke boldly of "future acquisitions of cinemas in Asia", has gone quiet on that matter.

If mm2 wants to get back to building an entertainment empire via acquisitions, it first needs to work harder with the pieces it already has to revive its share price and create more fund-raising opportunities.