SINGAPORE (Mar 25): DBS Group Research is downgrading its call on mm2 Asia to “fully valued” from “hold”, while reducing its target price to 10.7 cents from 30 cents previously.
The revised rating sees DBS expecting mm2 to yield a negative total return of more than 10% over the next 12 months.
This comes after the government on Tuesday announced that all entertainment venues, including cinemas, will be closed from March 26 to April 30 to contain the spread of the coronavirus.
With the filmmaker already reeling from lower demand in China, DBS analyst Ling Lee Keng believes this could further aggravate mm2 Asia’s near-term outlook. The group has a presence in countries including China, Hong Kong, Taiwan, Singapore and Malaysia.
In Malaysia, mm2 is the fourth largest cinema player with a total of 18 cinemas. The group has also acquired all eight Cathay cinemas in Singapore.
On top of the lockdown in Malaysia and the latest measures in Singapore, the cinema business is also expected to be hit by the postponement of scheduled Hollywood mega-movie releases, Ling notes.
“We expect cinemas to continue to adhere to the social distancing regulation even upon lifting of the temporary closure measure. Cinemas would need to have alternate seat arrangements, which implies a 50% cut in available seats,” she says.
Meanwhile, mm2 is expected to be impacted by 39%-owned concert and events producer UnUsUaL.
“UnUsUaL has postponed all scheduled concerts due to the clampdown of large-scale gatherings in most or all its target countries,” says Ling.
She adds that the company has also cut its discretionary spending and reduced payrolls by 10-20% to cope with the slowdown in its earnings.
Accounting for the worsening impact from Covid-19, especially in regions outside China, Ling has slashed mm2’s earnings forecasts for FY2020 ending March and FY2021 by 26% and 90% respectively.
“Our assumptions include gradual improvement in the fight against Covid-19 from 2HFY2021F onwards and a recovery in FY2022F,” says Ling. “We also expect the group to benefit from more government support packages to help to cushion the impact.”
While the group nurses a halt in its operations in Singapore and Malaysia, Ling says stabilising conditions in China could see a revival in demand there.
However, she warns that the nascent recovery in China could take a turn for the worse as the country tightens its quarantine rules for overseas travelers.
On a positive note, she observes that around 80% of mm2’s current productions has resumed operation in regions not affected by the lockdown.
The group has also set its sights on building a library of films and targeting online platforms, similar to streaming service provider Netflix.
“FY2020F could still see an increase in revenue, partly helped by projects completed earlier,” Ling says.
Going forward, though, she opines that funding for projects may not be as readily available amid the weaker global economy.
For now, mm2 expects to be cash flow positive, as the collection of trade receivables has not been significantly affected so far.
“However, given the expected prolonged negative impact from Covid-19, we would not rule out the possibility of weakening cashflows,” Ling says.
mm2 in a regulatory filing on Tuesday had announced that it has refinanced its loan facility through a five-year secured loan of $115 million with United Overseas Bank (UOB) on March 21.
Ling notes that close to $100 million in debt is due in 2021.
“mm2 moved into a net debt position following the acquisition of Cathay Cineplexes for $230 million in November 2017, that was financed mainly via debt,” says Ling. “The high interest expense has affected the bottomline. Going forward, mm2 would have to deleverage in order to boost earnings.”
As at 3.01pm shares in mm2 Asia are trading 13.7% higher, or up 1.7 cents, to 14.1 cents, while shares of UnUsUaL are up 2.6% at 11.9 cents.
