The last year has created an almost unprecedented environment of winners and losers - distortions of the playing field never seen before. There have been the stay-at-home stocks, the reopening stocks, meme stocks and the inflation trades. Developed markets have been eager to ‘look through’ short-term disruptions and price-in a full recovery. While in some emerging markets the struggling companies have been left behind. Mm2 Asia Ltd. is one of those companies.
As a successful film production, live concerts and events, and leading cinema business in Singapore and across Asia, mm2 has grown revenue from S$38.4 to S$268.7m in the 5-years leading up to COVID:
- The core business of film and content production grew from S$29.8m to S$78.7m over the same period due to the burgeoning demand for local content particularly in the Taiwan and Hong Kong markets.
- The cinema business built a strong position as a leader in Singapore and the third-largest player in Malaysia. Through acquisitions, these grew from S$4.8m to S$101.1m in turnover during the same 5-year period.
During its
rapid growth, mm2 had accumulated debts of almost S$342.7m as of March 20
compared to next to nothing, just a few years earlier. The borrowing facilitated
growth in the production business to meet demand from content companies and Southeast
Asian distribution through the cinema business. The business was just gathering
the momentum to reach escape velocity (read as: begin repaying their debts)
when COVID hit and led to rolling travel restrictions and a domestic lockdown.
As
production sets were shut down across Asia and cinemas closed during Singapore
and Malaysia’s lockdowns, revenue fell more than 90% during 1H21 (March – Sept
20). The remainder of 2020 was not much better for mm2 with only limited cinema
openings and major operational limitations in the production business.
Between the
beginning of 2020 and early 2021, the share price fell 75% and the company was
in a semi-distressed state, having announced a deeply discounted and
fully-underwritten rights-issue to repay debt obligations.
At its
nadir, the share price reached S$0.055 immediately following the rights-issue
in April, down 85% from the 2017 high. However, somewhat inline with the expression
that its always darkest before dawn, the right-issue was a watershed moment for
the company and significantly ‘derisked’ the pathway to recovery.
While
near-term revenue was volatile, we took the view that liquidity risks were now
behind the company and despite little visibility on earnings, there was a clear
plan to realise value through a spin-off of the cinema business which meant
investors participating in the April rights issue at $0.065 were effectively
getting the fast-growing and profitable production business for free.
The
company’s full-year results were released earlier this month and revealed a
much stronger financial position following the rights-issue and retirement of
the medium-term note, partly helped by better than expected operating results
in the Cinema and Film production business.
UOB Kay
Hian which recently initiated coverage of the company offered these
comments following the full-year results:
As we’ve seen in Europe and The United States, the reopening of economies is inevitable and living with COVID just a part of life going forward. Asia has been behind in reopening, with the most vulnerable populations and inadequate healthcare systems. Over the weekend, Singapore unexpectedly announced that they’re planning to ditch border restrictions, quarantine requirements under a policy change that would see no goals of zero transmission and us live with COVID like any other endemic disease.
This shift
is a major development for mm2, which was still operating with the risk of snap lockdowns that would impact the domestic cinema business in
particular, which is now just breaking even. Furthermore, it seems like this will open Singapore as a hub for regional concerts and events, as the company has
highlighted on the most recent earnings call.
mm2 still trades at a distressed valuation, however, confirmation of the company’s recently improved performance is likely to be what this stock which has been left behind needs to catch up.
Our report on the company is accessible here.
Company materials and other analysts reports are available on their IR website.
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