SINGAPORE (May 16): Spackman Entertainment Group reported a disappointing 1Q18, mainly because of the absence of profits recognised from its blockbuster movie Master and the underperformance of Golden Slumber.

However, revenue grew 31% y-o-y to US$10.5 million, partially due to the contribution of US$2.5 million from the acquisitions that the company has made so far, as well as US$4.5 million from the post-theatrical distribution of The Outlaws.

See: Spackman's 1Q earnings plunge 93% to $0.5 mil on absence of profit contribution from movies

“We slash its FY18F PATMI by 33% to reflect the underperformance of Golden Slumber,” says analyst Jarick Seet in an RHB Research report on Wednesday.

However, with last year's yield-accretive acquisitions boosting its recurring income and Sovereign Default is anticipated to hit the screens in 2H18, Seet remains positive on Spackman’s outlook.

This Spackman-produced movie on the Korean financial crisis stars top Korean actors Yoo Ah-in, who is managed by Spackman Media Group, and Kim Hye-soo. The film, which will be distributed by CJ Entertainment, is scheduled to begin screening in Korean cinemas in 2H18.

The movie’s estimated total production budget -- including prints and advertising costs -- is set at US$8.6 million. If box office sales are healthy, that could also boost Spackman’s earnings.

For now, RHB has a conservative 4.5 million ticket sales estimate for the movie, which would yield a net profit of US$2.5 million for the company.

“The key risk to our call is the volatility in profitability, as Spackman’s performance depends on the audience’s reception to its movies. Maintain ‘buy’, with a lower DCF-backed target price of 10 cents,” says Seet.

Previously, close to 100% of Spackman's revenue was from producing films. Revenue from popular movies would lead to a positive swing in its P&L, just like what happened in FY15 and FY16.

However, it also made a number of acquisitions in January as well as in 2017, that are yield-accretive and would likely contribute positively to its P&L. This should build its base of recurring PATMI, which RHB estimates at US$1.5-2 million p.a.

“We expect management to continue adding more recurring complementary revenue streams in the future, in order to reduce its reliance on the more unpredictable movie-making business,” says Seet.

As at 2.04pm, shares in Spackman are trading at 7.3 cents or 10.9 times FY18 forecast earnings.