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mm2 Asia posts 7.1% drop in Q4 earnings; DBS upgrades rating to 'buy' as value emerges

MAINBOARD-LISTED film production company mm2 Asia’s net profit fell 7.1 per cent to S$6.2 million for the fourth quarter ended March 31, from S$6.7 million in the previous year.

Revenue for the three months slipped 6.5 per cent to S$78.2 million from S$83.6 million a year ago, while gross profit inched down 0.7 per cent to S$33.9 million, the group said on Thursday night.

Earnings per share (EPS) stood at 0.53 Singapore cent for the quarter, down from 0.57 cent a year ago. EPS for fiscal 2019 was 1.65 cents, down from 1.93 cents for fiscal 2018.

On a full-year basis, net profit tumbled 14.5 per cent to S$19.1 million for FY2019 from S$22.4 million for FY2018 amid an increase in expenses, despite a surge in revenue.

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Revenue for the year grew 38.6 per cent to S$266.2 million, mainly generated from the cinema business which brought in S$56.9 million, largely due to full-year contributions from Cathay Cineplexes in Singapore and Lotus Fivestar Cinemas (M) in Malaysia. These two acquisitions occurred in Q3 2018, therefore mm2 recognised only four months of revenue from them for FY2018.

Administrative expenses rose 48.6 per cent to S$69.9 million for FY2019 because the group was expanding its businesses and had a “significant increase” in manpower, mm2 said. The group also restructured its bank borrowings, which incurred non-recurring professional fees.

Finance expenses more than tripled during the year to S$17.9 million, from S$4.9 million a year ago, because the group increased its borrowings and issued a new medium-term note and convertible bonds.

mm2 had S$36.8 million in borrowings as at March 31, more than seven times the S$5 million in borrowings a year ago. The group took out additional loans from banks and drew down on its revolving credit facilities to pay for the S$215 million deferred purchase consideration for the acquisition of Cathay Cineplexes.

Shares of mm2 were trading up 0.5 Singapore cent at 24.5 cents as at 11.59am on Friday.

Earlier on Friday morning, DBS upgraded its recommendation of mm2 to "buy", citing emerging value at the company’s current share price with a 43 per cent upside to its target price of S$0.34.

mm2 shares have shed some 27 per cent since DBS downgraded it to "hold" after the third-quarter results were released in February, said DBS analyst Ling Lee Keng.

Based on sum of the parts valuation, and stripping out its stakes in events company UnUsUaL and animation firm Vividthree, the market is valuing mm2’s core production and cinema segment at only S$144 million, Ms Ling said.

This works out to a P/Ebitda (price to earnings before interest, tax, depreciation and amortisation) ratio of slightly over two times for that segment, which is too low in DBS’s view, she added.

“mm2 paid 13.8 times P/Ebitda for the Cathay cinema chain in Singapore and about eight to nine times for the Malaysia cinemas, while peers are trading at about 5.5 times P/Ebitda”, Ms Ling said.

The group still needs to deleverage, given its swing to 0.8-time net gearing at the end of fiscal 2019 and the high interest expense, but DBS believes that the negatives are already priced in.

A key risk for mm2 is that the company has no long-term financing arrangements for productions, Ms Ling noted. Starting each production will be dependent on mm2’s ability to secure funding.

Another risk is the lack of good scripts for productions, which may lead to less support from stakeholders, she said.