EUR 850.00 For Business Accounts Only

Morningstar | Benefits of Diverse Asset Mix Evident in Event Hospitality and Entertainment's Result

Benefits of Event Hospitality and Entertainment's diverse asset mix were evident in its fiscal 2019 first-half result. On the positive side, the cinemas performed better than expected, with Australia EBIT up 10% and NZ up 20%, while Thredbo continued its recent upward earnings trend (EBIT up 7%). On the negative side, hotels struggled amid softer market conditions (EBIT down 3%) and the German cinema unit saw EBIT slump 74% as a result of cyclical and film quality-related issues.

These negative headwinds have led to an average 5% cut to our near-term group operating earnings estimates. However, due to the mostly temporary nature of the causes of this downgrade, our longer-term forecasts are broadly unchanged, and our AUD 13.00 fair value estimate is intact.

While weaker conditions in the key markets of Sydney, Perth, Cairns, and Wellington are constraining hotel earnings, underlying fundamentals remain sound. With hotel EBIT having grown at a CAGR of 27% over the past five years (around 40% of group earnings), a slowdown was inevitable especially with more supply coming into the market. Critically, the domestic cinema unit (again around 40% of group earnings) is returning to growth and is on a firm path to yield maximisation via customer/location segmentation, variable pricing, and digital initiatives.

Further, the sale of the one struggling unit in the portfolio, German cinemas, is on track to be completed in 2019 (waiting for regulatory approval), potentially realising up to AUD 350 million. This will add to Event's war chest (net debt just 1.3), as management explores redevelopment opportunities of its vast George Street, Sydney properties--long-term upside not yet captured in our valuation.

Investors' willingness to pay for this quality has cooled over the past six months due to cyclical factors impacting cinemas and, more recently, hotels. As a result, shares in no-moat-rated Event are beginning to show value relative to our intrinsic assessment.

First-half reported net profit after tax, or NPAT, was largely flat year on year at AUD 68 million. On an underlying basis and excluding the to-be-sold German business, NPAT was up 2% to AUD 88 million. The board declared a fully franked interim DPS of AUD 0.21, unchanged from a year ago.

At the segmental level, the Australian cinema unit delivered a 10% increase in EBIT to AUD 26 million, driven by better box office performance and benefits of variable pricing and other yield maximisation initiatives coming through. The New Zealand cinema unit also posted 20% EBIT growth to AUD 4 million. Hotels saw EBIT fall 3% to AUD 35 million, with the average room rate down low-single-digit terms for the Rydges and Atura brands, and the occupancy rate down to 79.5% for the QT brand (from 83.6% a year ago). Thredbo EBIT grew 7% to AUD 26 million, with a 3% increase in skier visits and 7% growth in yield particularly notable.

Finally, the German cinema unit suffered a 74% slump in first-half EBIT to AUD 4 million. Hollywood products failed to resonate with the German audience (Crazy Rich Asians for some reason was not popular) and there was a dearth of good-quality local products. Unfavourable weather conditions also contributed to the poor result. The sale of this asset is still subject to regulatory approval. As such, our forecasts continue to include contributions from this business for the time being.