Initiating Coverage Singapore 13 October 2016 Consumer Cyclical | Entertainment Buy Spackman Entertainment Group Target Price: SGD0.22 Price: SGD0.11 A Hallyu Star At Its Inflection Point Market Cap: USD33.6m Bloomberg Ticker: SEG SP We initiate coverage on Spackman, a top-tier South Korean movie Share Data producer with a BUY and a TP of SGD0.22, based on a 15x FY17F P/E. The Avg Daily Turnover (SGD/USD) 2.05m/1.51m group, probably in the best health since its IPO, is primed for a strong 52-wk Price low/high (SGD) 0.05 - 0.16 turnaround due to a few key near-term catalysts: 1. Its upcoming movie, Master, to be released in December; Free Float (%) 27 2. A 27.2% share stake in SMG likely worth ~USD45m; Shares outstanding (m) 399 3. It can sell SMG to raise cash for special dividends/share buybacks; Estimated Return 95% 4. Divestment of loss-making Opus Pictures cuts SG&A costs by 70%. Shareholders (%) Potential blockbuster movie, Master, to turn Spackman Entertainment Spackman Equities Group 38.8 Group (Spackman) profitable. Master – a crime action drama starring A-list Lee Yoo Jin 5.8 actors Gang Dong-won, Lee Byung-hun and Kim Woo-bin – hits cinema Havenport Asset Management Ptd Ltd 3.6 screens in December. The first trailer for Master generated a remarkable interest from viewers when it was released over the recent holidays in South Share Performance (%) Korea. Our expectation of 7.5m in ticket sales would yield Spackman profits of YTD 1m 3m 6m 12m USD5.6m and bring it back into the black. Absolute (20.0) 20.8 10.5 (16.6) 114.8 Spackman Media Group (SMG) a hidden gem. Spackman owns 27.2% of Relative (19.1) 21.4 11.2 (18.3) 119.6 SMG, the largest entertainment talent agency in South Korea. SMG manages >60 artistes, including A-listers such as Son Ye-Jin, Song Hye Kyo and Yoo Ah- Source: Bloomberg in. We estimate Spackman’s stake in SMG to be worth ~USD45m which is Spackman Entertainment Group (SEG SP) higher than its current market cap from a peer comparison, coupled with recent Price Close Relative to Straits Times Index (RHS) deals completed. Cash raised from any stake sale of SMG shares to potential content provider partners could likely be used to fund movies in FY17, as well 0.14 250 as share buy-backs or a potential special dividend. 0.09 160 0.04 71 Loss-making Opus Pictures LLC divested, SG&A costs cut by ~70%. With 250 the divestment of loss-making Opus Pictures significantly reducing the SG&A 200 costs, this event would likely be an additional drive to bounce Spackman back 150 into profitability. Its other production house, Zip Cinema Co Ltd, has a good 100 track record and aims to make 1-2 movies pa which, coupled with Spackman’s 50 Volm 15 16 16 16 15 joint ventures to make additional movies, could spur the growth going forward. 16 - - - - - - Oct Apr Jun Feb Dec Aug Significant Chinese interest and potential partnerships. Chinese firms sank >USD870m in South Korean content providers in 2010-2015. These include Source: Bloomberg behemoths Dalian Wanda Group, Alibaba and Huayi Brothers Media Corp Spackman’s Top 3 movies and artistes (Huayi Brothers). This strong interest is likely to pave the way for more partnerships/collaborations for Spackman, like the one with Alibaba Pictures. Trading at a huge discount to peers. Spackman’s overseas peers are trading at an average of 46x, while local peers are trading at a 32x average. The counter is currently trading at just 7.5x FY17F P/E. We initiate coverage with a BUY call and a SGD0.22 TP derived through a 15x FY17F P/E multiple. Key risks: Lack of earnings visibility due to the inherent nature of the business; for more description of key risks, see page 12. Source: Korean Film Biz Zone (KoBiz) Forecasts and Valuations Dec-13 Dec-14 Dec-15 Dec-16F Dec-17F Total turnover (USDm) 11.9 15.6 17.8 21.0 35.5 Reported net profit (USDm) 2.61 (8.08) (1.27) 0.55 4.47 Recurring net profit (USDm) 2.61 (8.08) (1.62) 0.55 4.47 Recurring net profit growth (%) 0.0 (410.0) (80.0) 0.0 714.8 Recurring EPS (USD) 0.01 (0.02) (0.00) 0.00 0.01 DPS (USD) na na na 0.000 0.003 Recurring P/E (x) 12.8 na na 61.2 7.5 P/B (x) 3.72 2.07 2.23 2.17 1.81 P/CF (x) 8.2 na na 4.0 10.9 Dividend Yield (%) na na na 0.5 4.0 EV/EBITDA (x) 7.1 na na 15.3 3.0 Analyst Return on average equity (%) 40.8 (64.3) (8.1) 3.6 26.3 Jarick Seet Net debt to equity net cash net cash net cash net cash net cash +65 6232 3891 Our vs consensus EPS (adjusted) [email protected] Source: Company data, RHB See important disclosures at the end of this report 1 Powered by the EFA Platform Spackman Singapore Initiating Coverage 13 October 2016 Consumer Cyclical | Entertainment Financial Exhibits Financial model updated on: 2016-09-30. Asia Financial summary Dec-13 Dec-14 Dec-15 Dec-16F Dec-17F Singapore Recurring EPS (USD) 0.01 (0.02) (0.00) 0.00 0.01 Consumer Cyclical EPS (USD) 0.01 (0.02) (0.00) 0.00 0.01 Spackman DPS (USD) 0.000 0.000 0.000 0.000 0.003 Bloomberg SEG SP BVPS (USD) 0.02 0.04 0.04 0.04 0.05 Buy Weighted avg adjusted shares (m) 395 399 399 399 399 Valuation basis Valuation metrics Dec-13 Dec-14 Dec-15 Dec-16F Dec-17F 15x FY17F P/E. Recurring P/E (x) 12.8 na na 61.2 7.5 P/E (x) 12.8 na na 61.2 7.5 Key drivers P/B (x) 3.72 2.07 2.23 2.17 1.81 Success on upcoming movies, partnership deals. FCF Yield (%) 12.0 (36.1) (57.6) 22.1 6.2 Dividend Yield (%) 0.0 0.0 0.0 0.5 4.0 Key risks EV/EBITDA (x) 7.1 na na 15.3 3.0 reception of movies produced directly linking to ticket sales. EV/EBIT (x) 7.2 na na 18.4 3.2 Company Profile Income statement (USDm) Dec-13 Dec-14 Dec-15 Dec-16F Dec-17F Spackman Entertainment Group’s businesses span Total turnover 11.9 15.6 17.8 21.0 35.5 theatrical motion pictures, documentaries, talent Gross profit 5.5 0.0 7.8 6.7 8.0 management as well as studio photography. With EBITDA 3.5 (7.3) (0.9) 1.2 6.1 three film production labels at the core operations of Depreciation and amortisation (0.1) (0.1) (0.1) (0.2) (0.2) the business, the company is primarily involved in producing, presenting and distributing motion films. Operating profit 3.4 (7.4) (1.0) 1.0 5.8 Net interest (0.1) (0.1) (0.1) (0.4) (0.4) Exceptional income - net 0.0 0.0 0.2 0.0 0.0 Pre-tax profit 3.2 (7.5) (0.9) 0.7 5.4 Taxation (0.6) (0.6) (0.4) (0.1) (1.0) Recurring net profit 2.6 (8.1) (1.6) 0.5 4.5 Cash flow (USDm) Dec-13 Dec-14 Dec-15 Dec-16F Dec-17F Change in working capital 1.25 (4.16) (19.66) 7.30 (1.98) Cash flow from operations 4.04 (11.80) (16.56) 8.41 3.09 Capex (0.04) (0.31) (2.78) (1.00) (1.00) Cash flow from investing activities (3.44) (0.67) (7.90) (1.00) (1.00) Proceeds from issue of shares 3.74 14.14 0.00 0.00 0.00 Dividends paid 0.00 0.00 0.00 (0.16) (1.34) Cash flow from financing activities 5.26 15.72 16.73 (0.52) (1.70) Cash at beginning of period 3.32 9.21 12.18 4.11 11.00 Net change in cash 5.85 3.25 (7.73) 6.89 0.39 Ending balance cash 9.21 12.18 4.11 11.00 11.39 Balance sheet (USDm) Dec-13 Dec-14 Dec-15 Dec-16F Dec-17F Total cash and equivalents 11.5 15.7 11.0 17.9 18.3 Tangible fixed assets 0.7 0.9 3.3 4.1 4.9 Intangible assets 0.1 3.4 0.8 0.8 0.8 Total investments 0.0 0.0 3.6 3.6 3.6 Total other assets 5.5 2.0 1.8 1.8 1.8 Total assets 25.8 31.9 57.3 56.3 72.6 Short-term debt 1.3 1.2 3.1 3.1 3.1 Total long-term debt 1.3 0.0 2.0 2.0 2.0 Other liabilities 0.0 0.0 0.0 0.0 0.0 Total liabilities 16.8 14.6 40.6 39.3 52.4 Shareholders' equity 8.9 16.2 15.1 15.4 18.6 Minority interests 0.0 1.1 1.6 1.6 1.6 Total equity 9.0 17.3 16.7 17.1 20.2 Net debt (9.0) (14.4) (5.9) (12.8) (13.2) Total liabilities & equity 25.8 31.9 57.3 56.3 72.6 Key metrics Dec-13 Dec-14 Dec-15 Dec-16F Dec-17F Revenue growth (%) 170.1 31.2 13.9 18.4 68.9 Recurrent EPS growth (%) 0.0 (407.3) (80.0) 0.0 714.8 Gross margin (%) 46.6 0.3 44.1 31.8 22.6 Operating EBITDA margin (%) 29.0 (46.9) (5.1) 5.8 17.0 Net profit margin (%) 21.9 (51.8) (7.2) 2.6 12.6 Capex/sales (%) 0.4 2.0 15.7 4.8 2.8 Interest cover (x) 24.7 (70.7) (13.7) 2.9 16.3 Source: Company data, RHB See important disclosures at the end of this report 2 Spackman Singapore Initiating Coverage 13 October 2016 Consumer Cyclical | Entertainment Investment Merits Movie-maker turning around with the disposal of loss-making production arm.