SINGAPORE (Nov 7): CIMB is positive on mm2 Asia’s proposed acquisition of Cathay Cineplexes, which it believes will give the entertainment group a strong foothold in Singapore and enhanced bargaining power with suppliers in the industry.
This will mark the group’s fourth cinema acquisition and its first outside of Malaysia, following its aborted Golden Village (GV) Singapore deal.
See: mm2 Asia in option agreement to acquire Cathay Cineplexes for $230 mil
The research house maintains its “add” recommendation on a stock while raising its target price estimate to 76 cents from 58 cents previously, on earnings per share (EPS) upgrades as it rolls over to CY19F.
In a report last Friday, analyst Ngoh Yi Sin notes that the $230 million purchase price implies 13.8 times adjusted FY16 EBITDA, which she believes to be “pricey” relative to previous deals, but will allow the group to gain rare Singapore-based assets, full ownership and an established brand.
“We think this includes a premium for full ownership (versus 50% of GV Singapore) and substantial goodwill for the Cathay brand (estimated S$24-30 million), in exchange for exposure to the local cinema exhibition scene. This also allows mm2 to enlarge its regional presence and elevate its bargaining power with suppliers,” elaborates the analyst.
See: mm2 posts 2Q earnings more than double to $4.60 mil
Observing continued strong earnings growth in the group’s latest 1H18 results, Ngoh assumes a 65% debt financing structure for the Cathay deal at a 3.5% interest rate, as the group has an estimated $37.3 million of remaining proceeds from its IPO and share placements.
The deal will possibly raise mm2’s net gearing to 85% by end FY19, in the analyst’s view.
After adjusting for earnings contributions from Cathay post-acquisition and higher financing charges, Ngoh has raised FY18-20F earnings per share (EPS) estimates by 5.5-16.4%.
She also sees future opportunities for mm2 not only in core production extending to other forms of content, but also the potential for more regional distribution platforms to capture higher advertising dollars as well as synergistic mergers and acquisitions (M&As).
“We remain positive on [mm2 Asia’s] pipeline of concerts and events, as Unusual penetrates North Asia, and adds a new product line with the upcoming collaboration to present 48 ‘Disney On Ice’ shows in Korea and Taiwan,” she adds.
As at 12:05pm, shares in mm2 are trading 0.88% higher at 57 cents, 3.7 times FY18 book value.
