Mm2 Asia is selling its cinema biz

mm2 Asia has made headlines recently for selling its Cinema business 4 years after acquiring it for S$230 million in year 2017.

This shouldn’t come as a surprise because the company has been announcing its intent for the past year given how all the business segments have been badly affected during the Covid-19 pandemic.

In fact, its share price has declined steadily from a high of S$0.48 on June 2017 to merely S$0.056 on 31 August 2021, indicating that the debt-laden purchase of Cathay Cineplexes did not sit well with investors.

Hence, the sale of the Cinema business may be a welcome move to investors because mm2 Asia can now become more of an asset-light company to navigate through this precarious Covid-19 situation.

With that in mind, we will run through a revenue breakdown of the firm and also explore how the Cinema sale can lead to a stronger financial position for mm2 Asia.

MM2 Asia Profile

Headquartered in Singapore, mm2 Asia Ltd (SGX: 1B0) is a leading producer of films and TV/online content in Asia and comprises of 4 main divisions:

• Content Production, Distribution, and Sponsorships (Content)
• Post & Content Production under Vividthree Holdings Ltd. (OMK.SI)
• Cinemas under two brands: Cathay Cineplexes and mmCineplexes (Cinema)
• Concert & Events under UnUsUaL Ltd (1D1.SI)

According to its FY2021 results presentation, the bulk of mm2 Asia’s revenue comes from its core content production/distribution business at S$52.5 million out of the total S$75.2 million revenue (69.8%).

One important area to note is how the revenue of both the Cinema and Events/Concert (under UnUsUaL) segments plunged by 82.1% and 97.9% year-on-year, devastated by the COVID-19 pandemic.

Selling off the Cinema business

On 30 August 2021, mm2 Asia announced that it has signed the non-exclusive SPA with Kingsmead Properties for the proposed sale of its 80% controlling stake for its Cinema Business.

The whole transaction values the cinemas at S$84.8 million but it would require mm2 Asia’s shareholders’ approval at an EGM.

The firm will collect net proceeds of S$67.3 million but also incur a loss of S$84.7 million.

According to the press release, the proceeds will be used to pare down the Group’s borrowings, specifically for the convertible bonds due on 31 December 2021.

mm2 Asia’s Founder and Executive Chairman, Melvin Ang also shared the rationale on why the firm is selling it at a loss:

“The cinema business has been a strategic part of the Group’s Content Creation and Distribution business, but it has been affected by Covid-19.

With this proposed sale, it will stabilize the Group’s financial situation and allow mm2 to continue to focus on the development and strengthening of core production content growing opportunities.”

Shoring up the balance sheet

The reason behind the Cinema’s sale is mainly due to mm2 Asia’s lacking financial position for the past few years.

A quick glance at mm2 Asia’s total debt to equity shows that it has jumped from 0.135x in FY2017 to 2.69x in FY2021. The sharp increase is due to both the increase in and a drop in shareholders’ equity from the plunge in share price.

On this note, the company also shared about how it will significantly shore up their financial position after the rights issue and Cinema’s IPO.

In particular, the interest savings from convertible bonds conversion and loan repayments will amount to c. S$6 million and would improve its net profits greatly.

Last but not least, its net gearing will be reduced to a much reasonable 0.4x and put the firm in a better position to focus on their core operations.

Conclusion

With sales revenue essentially dropping to rock bottom in the past year, it is pretty clear that the fortunes of the firm depend on the pandemic’s recovery.

Although vaccination rates have been on the uptrend across countries which mm2 Asia operates in, there may be more headwinds going forward due to new virus strains and outbreaks on and off.

As such, it is vital that mm2 Asia maintains a strong balance sheet and pivot to online streaming while waiting for the dust to clear.

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