In a matter of just 2.5 years since its initial public offering, shares of mm2 Asia (mm2) have flipped more than 10 times its IPO price of $0.0625 (after adjusting for stock split) per share to the current $0.64 per share. The company was the first local content producer to list on the Catalist board on the Singapore Exchange (SGX).
Movie-goers might be familiar with “Ah Boys To Men” in 2012, a local box-office hit that was the highest-grossing Singaporean film that raked in four times its $3 million production budget. The film was co-produced by mm2 and renowned local film director Jack Neo (and his J Team Productions).
To date, mm2 has grown to be a fully-integrated producer of films and entertainment content, encompassing the entire filmmaking process that also includes post-production works, securing financing, advertising and sponsorships. Entertainment content has expanded to entail those in China as well as Malaysia. mm2 is also the major shareholder of UnUsUal, an event and concert production house that also listed on SGX recently.
From the start of the year, shares of mm2 have gained slightly more than 40 percent, outperforming the local benchmark Straits Times Index that only rose about 12.4 percent. We dug into mm2 to discover what led to its stellar rise and why we think there is more room for further upside.
Strong Financial Performance
A quick glance at mm2’s track record and investors will see why this stock is showing such impressive performance. In a matter of five financial years, mm2 increased its revenue from $9.9 million in FY13 to $95.4 million in FY17, representing a total increase of 863.6 percent.
Over the same period, the group also managed to improve its profitability significantly: gross margin rose from 16.7 percent in FY13 to 47.5 percent in FY17 while net margin increased from 8.2 percent to 19.7 percent. Correspondingly, the group generated a gross profit of $1.7 million and net profit of $0.8 million in FY13 and $45.3 million and $18.8 million in FY17, respectively. Overall, the group’s bottom line grew more than 23-folds.
Earnings Accretive Acquisitions
To produce such spectacular rate of growth, mm2 has been aggressively acquiring assets in the entertainment space that increase its content exposure and distribution channels.
In July 2016, the group completed the acquisition of business assets from Mega Cinemas Management. In the prior financial year, mm2 acquired two cinemas from Cathay Cineplexes and, altogether, the group operates five cinemas in Malaysia. Following which, on 18 May 2017, the group further signed a sale business agreement with Lotus Fivestar Cinemas (M) to acquire 13 cinemas from the seller, bringing the total number of cinemas under operation in Malaysia to 18. The target completion date of the acquisition would be within four months of the signing and should accrete to FY18’s financial results.
The group further announced that it is in preliminary discussions to acquire a stake in Golden Village Cinema business in Singapore, which is the leading cinema exhibitor in the local space. Traditionally, film distributors buy and sell film rights to cinemas. The proceeds from the ticket sales will then be shared three-way amongst the producers, distributors and cinemas and according to industry sources, cinema operators own the largest share to the proceeds. As such, mm2’s foray into cinema operations will give the group a strong recurring source of revenue, in addition to being a highly profitable business segment.
Apart from cinema operations, mm2 acquired a majority stake of roughly 82 percent in UnUsUal in August 2016. UnUsUal is one of Asia’s largest organisers of concerts and entertainment acts and has a rather profitable business, reporting revenue of $27.1 million and net profit of $5.9m for FY17.
In April 2017, the group spun off UnUsUal via a listing on SGX to unlock shareholder value and also to allow it to tap on public funds for its expansion. Post placement, mm2 is estimated to have retained an indirect shareholding of about 41.9 percent in UnUsUal. Reflecting the optimistic sentiments for UnUsUal’s business, shares of the company more than doubled to $0.51 per share from its IPO price of $0.20 per share in merely a month’s time.
Overall, we find that mm2 is shaping up an overarching infrastructure of channel distribution and cross-marketing platforms. This makes mm2 highly lucrative to work with in the entertainment space hence enabling the group to find better partnerships for content creation and distribution which are the group’s core business. For instance, mm2 recently signed a deal with a global media conglomerate Turner Asia Pacific, to co-produce five cinematic films with multi-million dollar budget over the next three years.
It is also expected that the group’s focus on North Asia (specifically China) will reap production of higher-margin contents. This is because productions in China are of bigger production budget than local productions. Notwithstanding movies, mm2 can also co-produce reality TV shows and dramas and in December 2015, the group has signed an agreement with Hesheng Media Group, a leading integrated media company in China, to create content focused on the Chinese market.
Going forward, we believe that further penetration into China, expanded recurring revenue from cinema operations and UnUsUal’s expansion will be greatly rewarding for mm2 and its shareholders.
At the current share price of $0.64 per share, mm2 is trading at about trailing 12-months price-to-earnings (TTM P/E) of 35.9 times.
While the valuation might seem a little steep compared to other local-listed peers, mm2 is the more profitable counter, registering superior return-to-common-equity (ROE) of 30.7 percent. Comparatively, Alibaba Pictures Group, the largest of the three, reported a negative TTM ROE of 5.8 percent on a net loss of Rmb958.6 million ($199.5 million equivalent).
Consequently, it might justify why mm2 is trading at a higher multiple. Given that the group still firing on all cylinders, we think shares of this great counter are going at a rather fair price.