mm2 Asia has deleveraging initiatives in place, with corporate actions set to reduce gearing and more than halve debt, say analysts.
DBS Group Research analyst Ling Lee Keng is upgrading the media production company to “hold” from “fully valued”, with a reduced target price of 8.4 cents from 13 cents in November.
“The group has embarked on positive developments in a bid to pare down its debt that stood at $264 million as at end-September 2020, or 1.1x net gearing. The high gearing is one of the biggest concerns for the group, besides the challenging environment due to the Covid-19 pandemic,” writes Ling in a Feb 19 note.
These proposed actions include a spin-off and listing of its cinema business and a possible merger with Golden Village cinemas in Singapore.
“The proposed spin-off and listing, targeted for 3Q this year, will allow the cinema business to be financially independent from the group and raise the funds required for its new growth opportunities without relying on the group for financing or financial support,” says Ling.
See: mm2 Asia mulls separate listing of its cinema business
In Singapore, following the acquisition of Cathay Cineplexes, the group became the second-largest cinema operator in Singapore, with 64 screens across eight locations under the brand Cathay Cineplexes.
A successful spin-off is overall positive for the group, says Ling. “Gearing would hence be reduced. The absence of huge interest expenses would help to boost its bottomline.”
“Furthermore, the cinema business was badly affected by the Covid-19 pandemic. The cinemas in Malaysia remained closed, though there were some indications that certain locations may be allowed to open but subject to restrictions. The Singapore ones are operating on a restricted capacity. In 1HFY2021, revenue for the cinema segment plunged by 92.7% y-o-y to $3.6m, and hence reported a huge loss. We expect losses to continue at least till 2HFY2022/FY2023F.”
mm2 Asia has entered into a Heads of Agreement for the possible merger of its cinema business with Golden Village cinemas in Singapore, which is owned by Orange Sky Golden Harvest Entertainment (OSGH).
See also: Singapore private equity investor expresses interest in mm2 Asia core business
Both parties will bring in one or more new investors to inject capital into the merged businesses. mm2 Asia operates eight cinemas in Singapore under the Cathay brand and 14 cinemas in Malaysia under the Cathay Cineplexes Malaysia, Mega Cinemas and Lotus Fivestar brands, as well as a movie film distribution business and an online streaming business. OSGH has 14 cinemas in Singapore under the Golden Village brand. The details of the merger, including mm2’s stake in the merged entity, have not been finalised yet.
In addition, mm2 Asia has received an in-principle approval from the SGX for its proposed rights issue. The proposal involves the issuance of one rights share for every one existing share held, at 4.7 cents for each rights share. The issue price is at a 60.8% discount to the last closing price on 1 Feb 2021.
See also: mm2 Asia to tap shareholders for $52.15 mil with 1-for-1 rights issue
Upon the completion of the rights issue, expected to take place in the first week of April, mm2 will receive net proceeds of $52.2 million, which will be mainly utilised to pay off the medium-term note due on Apr 27, 2021 ($50m + 7% interest). The renounceable rights issue is fully underwritten by the lead manager, UOB Kay Hian.
Finally, the group announced on Feb 7 that it has received a non-binding term sheet from a Singapore private equity investor expressing interest in a potential acquisition involving taking a minority stake in one of the group's core businesses. The terms of this term sheet are still subject to finalisation.
Outlook
The group’s core business in content production and distribution has a strong pipeline of 26 projects valued at $99 million till FY2022, higher than previous years. Financing has been secured for the bulk of these projects. With the increasing demand for more content by various streaming platforms in Asia, the group targets to derive 40% of the content production revenue from streaming channels by FY2022.
Meanwhile, concert production arm UnUsUaL Limited could see pent-up demand. “We could see pent-up demand for out-of-home and live entertainment after the easing of Covid-19 lockdowns. Hence its 39%-owned UnUsUaL could turn around once demand returns,” says Ling.
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mm2 targets to reduce its debt by over 50% following the rights issue and cinema IPO. The bulk of the debts are currently at the group level.
Post the cinema IPO, a portion would be converted to cinema equity and some of the debts could be transferred to the cinema entity. About $54.7 million convertible bonds are expected to be converted to cinema equity, while another estimated $30 million of debt could be transferred from the parent level to the standalone cinema entity. “Hence, we could see a significant improvement in the balance sheet as well as profitability at the mm2 group level,” adds Ling.
PhillipCapital head of research Paul Chew and research analyst Vivian Ye also issued a report on mm2 Asia. The company is non-rated in PhillipCapital’s Feb 15 note.
As at 11am, shares in mm2 Asia are trading flat at 8.3 cents.
