UnUsUal Limited Initiation Report

UnUsUal Limited is one of the leading companies in concert promotions and large-scale events production in Asia. It was founded in 1997 by two brothers, Mr Leslie Ong and Mr Johnny Ong. In 2016, the founders sold a majority stake to mm2 Asia Limited, a producer of films, TV and online content listed on the SGX Mainboard. On 10 April 2017, majority shareholder MM2 successfully listed UnUsUal Limited on the Singapore Exchange Securities Trading Limited Catalist Board with ticker code: 1D1. It IPO-ed at a share price of $0.20.  As at 13 Nov 2019, it has a market capitalisation of SGD$319 million.

Business Model of UnUsUal Limited

According to its prospectus, UnUsUal Limited predominantly operates through 2 business segments- (i) Production and (ii) Promotion as shown in Diagram 1.

In the business of producing large-scale events, UnUsUal Limited provides support to an artiste’s team or event organisers to set up and install concerts/events. As consumers desire for more novel experiences, it is critical that concerts are developed with more intensive use of special effects to stay relevant. UnUsUal Limited is able to meet this need as it has one of the largest technical equipment inventories in Singapore which allows it to offer all-round technical solutions in the provision of audio, staging, lighting and video designs. Maintaining a core crew and equipment cost make up bulk of the costs in this business segment.

Under Promotion, it is vital that UnUsUal Limited builds and maintains good working relationships with the artistes and their teams as this allows the group to secure top artistes and the best concert venues. Key cost drivers in this segment include venue costs, marketing costs and artiste fees. The value chain of a live music industry is shown in Diagram 2 and Heartland Boy also highlights the services that the company offers.

Since 2017, UnUsUal Limited also started to diversify from live-music concerts to a new vertical, Family Entertainment. This include promoting globally-acclaimed franchises such as Disney on Ice, Walking with Dinosaurs etc. This year, it even jointly developed and produced APOLLO 11- The Immersive Live Show, to which it co-owns the intellectual property rights. Unfortunately, the reviews online were not fantastic, but a company does not always get it right at the first time, especially so for new ventures. It is also why Heartland Boy assumes that the APOLLO 11 will simply achieve break-even in his analysis as shown in Diagram 5A below.

Investment Merits of UnUsUal Limited

1. An Integrated Production Company And Promoter

Given that UnUsUal Limited is an integrated production company and promoter, it is able to reach out to artiste managers or booking agents directly, by undercutting the promoter and proposing new production ideas. Having these twin capabilities is a strong selling point and it also means that it has lower financial breakeven point for each concert that it produces and promotes. It has successfully built a reputation for being the preferred partner for several big-name artistes such as Jacky Cheung, JJ Lin etc.

In addition, UnUsUal Limited’s management has also revealed during analyst calls and AGMs that they are also on the lookout to opportunistically acquire companies in the industry to strengthen its grip on the value chain and derive synergies regionally.

2. Consistent And Strong Earnings Growth Since IPO

Since UnUsUal Limited IPO-ed in April 2017, it has delivered both top-line and bottom-line growth every year as shown in Diagram 3.

If 2017 15-month earnings was pro-rated to 12 months, this represents CAGR of 53%. In addition, in FY2019, net profit margin also expanded from a stable 21.6% to 23.1%, as shown in Diagram 4. Stabilized ROE is also a very impressive mid-20s.

Ironically, despite posting record financial results, its share price has declined gradually from $0.50 cents in Jan 2018 to a all-time low of $0.245 in Oct 2019. It was this anomaly (share price and results not moving in tandem) that first caught the attention of Heartland Boy.

3. Strong pipeline of events to be recognised

UnUsUal Limited reported a poor 1Q2020 result and its share price was battered down. However, Heartland Boy felt that that it was unwarranted as it had lined up plenty of concerts in the second half of the year. Given that its revenue and profit recognition policy is upon completion of the events, Heartland Boy estimates that it can report profits of S$8.0 million (Diagram 5A) and S$6.0 million (Diagram 5B) in 2Q2020 and 3Q2020 respectively.

These estimates were derived by estimating venue size and average ticket prices to ascertain the revenue before assuming a 20% net profit margin (recall that UnUsUal Limited achieved 23% last year). Coupled with the profit of $1 million recorded in the first quarter of the financial year, UnUsUal Limited should be able to achieve record profits in FY2020 again.

4. Business Is Easy To Scale

UnUsUal Limited’s has a very scalable business model. It leverages on its existing relationships with various artistes to produce concerts in global venues. For instance, the company plans to bring JJ Lin’s shows to Sydney in Australia and also to cities where large Asian demography bases exist. It aims to bring more artistes to countries that have experienced a surge in demand for Mandopop/Cantopop.

In addition, the demand for such entertainment is more price inelastic than perceived. Adolescents would scrimp and save to be able to afford the ticket price to watch their idols in the flesh. Likewise, doting parents often do their utmost to fulfill the wishes of their children. Such behavioural attitudes suggest that demand may not drop as much compared to a traditional luxury good during a recession.

Investment Risks of UnUsUal Limited

1. Departure of Key Employees

As aforementioned, UnUsUal Limited is able to replicate concerts globally because of the good relationships it enjoys with the various artistes. Jacky Cheung, JJ Lin and Wakin Chau are all good examples of artistes who have worked with UnUsUal Limited over a prolonged period of time across the globe.

It is also important to realise that the people holding these relationships with the various artistes are vital ingredients in the entire equation. This is because oftentimes, a particular artiste or artiste manager may have agreed to work with the company only because they feel comfortable and trust that particular company’s representative. These allow the employees to secure the rights to organise, promote and produce the live events/concerts. Therefore, departure of key employees (such as the 2 founders) may have a direct impact on UnUsUal Limited’s revenue and earnings growth.

2. Declining Operating Cashflow

A more major area of concern for Heartland Boy is the declining operating cashflow of UnUsUal Limited. As illustrated in Diagram 3, it went from a positive $9 million to a negative $6 million in FY2019. This trend continued into 1Q2020 and Heartland Boy does not seem entirely satisfied with the explanation of “Operating cash flow before working capital changes for FY19 was SGD18.1m. Due to higher operating activities, SGD22.5m was used in net working capital – as a result, the group generated net cash outflow of SGD6.2m from operating activities during this period”

This would be a key question that he would like to ask management if he has the chance to interact with them face to face.

3. Events Cancellation

Typically, UnUsUal Limited would have incurred significant amount of costs prior to an event and such sunk costs cannot be recovered. Refunds to concert-goers have to be made in the event of a postponement. It may incur additional costs to stage the event at an alternative date as well.

However, it is important to realise that events cancellation or postponement are par for the course since artistes have very fickle schedules. What would be a cause for worry would be too many of such cancellations happening within a financial year. Not only would its financials deteriorate, its reputation in the market would also take a hit.

Review of UnUsUal Limited

Heartland Boy still remember attending Coldplay’s concert in Singapore back in 2017 where tickets were sold out within hours. News of many disappointed fan convinced Coldplay to add a second show. While UnUsUal Limited was not the promoter that brought Coldplay to Singapore (it was Lushington Entertainment), this concert experience left a vivid impression on him. It convinced him that going to such pop concerts are experiences that cannot be compared with other forms of discretionary spending. Therefore, so long that UnUsUal Limited is able to replicate this winning formula globally and with more artistes, it should do just fine.

Vested at an average price of 0.284 cents since beginning Nov 2019. Probably a short-term play as he is banking on the next few quarters of positive results to reverse the share price movement. He will continue to share his thoughts of UnUsUal Limited on forums such as InvestingNote.

This article was published on 13 Nov 2019.

Disclaimer: The information contained herein is the writer’s personal opinion on his blog and do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein.