SINGAPORE (June 4): DBS Vickers Securities is upgrading its call on mm2 Asia from “hold” to “buy” while raising its target price by a cent to 34 cents, which is pegged to 16 times FY20F earnings for the core business, and in line with listed peers in Asia.

Meanwhile, CGS-CIMB Research maintains its “add” call on the stock with an unchanged target price of 37 cents.

In a report last Friday, DBS analyst Ling Lee Keng says she sees value emerging from mm2 at its 30 May closing price of 24 cents, which implies that the market values the its core production and cinema segment at just $144 million.

Ling estimates this to work out to a P/EBITDA of slightly over 2 times, which she considers “too low” as mm2 paid 13.8 times for its Cathay cinema China in Singapore, and about 8-9 times for the Malaysia cinemas while its peers are trading at about 5.5 times P/EBITDA.

Ling’s revised target price of 34 cents implies 5.5 times P/EBITDA for the cinema businesses, and current market valuation for UnUsUaL and Vividthree.

“Though the group still needs to deleverage given the swing to 0.8 times net gearing at end-FY19 and high interest expense, we believe the negatives are already priced in,” says the analyst.

Separately, CGS-CIMB analyst Ngoh Yi Sin has adopted more conservative revenue assumptions for UnUsUaL and Vividthree following the group’s latest FY19 earnings announcement, which has resulted in her cutting FY20-21F EPS estimates by 3.4-3.8%.    

See: mm2 Asia's FY19 earnings fall 14.7% to $19.1 mil on net margin decline

Nonetheless, she continues to like the stock for its earnings recovery, cheap valuation of 9.9 times FY21F P/E, and as a proxy for rising Asian content – as rising content investments in the region could benefit mm2 not only in terms of higher North Asia core production revenue contribution, but also cost savings in film rental.

The analyst also estimates mm2’s ongoing cinema business restructuring to add at least $1-1.5 million to FY20F EBITDA once the resultant cost-savings initiatives begin to take effect.

“While [mm2’s] past three years had largely been driven by M&As, we see FY20F as the year when mm2 focuses on organic growth,” comments Ngoh.

“We expect the launch of family-themed entertainment shows and bigger overseas concerts to be UnUsUaL’s FY20-21F earnings drivers. Vividthree continues to secure new locations for its ‘Train to Busan’ virtual reality show,” she adds.

As at 10.50am, shares in mm2 are trading flat at 24 cents or 1.2 times FY20F book value, according to DBS estimates.