EUR 850.00 For Business Accounts Only

Morningstar | Don't Miss the Event When Opportunities Present. See Updated Analyst Note from 24 Jun 2019

A key takeaway from a competitor's recent investor day is the appeal of Event Hospitality and Entertainment's cinema exhibition unit. Accounting for almost half of the group's earnings (excluding for-sale German cinemas and corporate costs), the combined business in Australia and New Zealand generated an EBIT CAGR of 5% in the past five years, while the asset base increased by only 3% per year on average. There are structural threats from digital alternatives. But the impact has been moderate to-date and studies have shown there may be a positive correlation between streaming consumption and movie-going.

The cinema unit is augmented by a growing hotels division, one that speaks for 40% of group earnings and has produced a five-year historical EBIT CAGR of 27% on an asset base growing by only 10% per year on average. Favourable long-term demand-supply dynamics and outlook for key operating metrics (revenue per available room, occupancy rate) provide a solid backdrop, as management continues its multibrand strategy and portfolio refurbishment.

Event is not impervious to mishaps. Previous forays into entertainment technology and leisure attractions (for example, Featherdale) did not amount to much. The German cinema business has been struggling for three years. However, the no-moat-rated group is clinical when it comes to disposing of underperforming assets, with the impending AUD 300 million-plus sale of the Deutsche theatres a prime example of astute capital management. A seven-year EPS and DPS CAGR of 7% and 5%, respectively, without ever putting the balance sheet in jeopardy, is testament to management prowess, considering the highly cyclical markets in which Event operates.

Despite these positives, near-term cyclical weakness in both cinemas and hotels has driven shares in Event to below our unchanged AUD 13.00 fair value estimate. The risk-reward proposition is improving, supported by a secure 4%-plus fully franked dividend yield at current levels.

The near-term weakness is part and parcel of operating in the volatile movie and hotel space. Box office weakness in the March quarter of 2019 was already well-flagged by management back in February (and subsequently confirmed by a competitor). But Avengers: Endgame proved to be a huge blockbuster and the upcoming "tent-pole" film slate looks impressive, headlined by the ever-popular Toy Story, Lion King, and Spiderman franchises. Management's investment and refurbishment plans, involving new sites, more Gold Class seats, differentiated food/beverage and dwell areas according to market demographics, ensure maintenance of cinema's appeal to consumers. Furthermore, a December 2018 EY study shows that consumers who go to the movies often typically spend more hours streaming movies as well (for example, those who go to the movies nine times or more a year streamed 4 hours more per week than those who went to the movies once or twice a year).

We maintain our five-year EBIT CAGR forecast of 5% for Event's combined Australia and New Zealand cinema unit. That derives from revenue CAGR of 3% and a midcycle EBIT margin 17.0% (both in line with the five-year historical average).

As for the hotels division, current weakness in the key markets of Sydney, Melbourne and Perth is putting a brake on earnings. On a nationwide basis as per Dransfield Hotel Futures 2019 report, revenue per available room in fiscal 2019 is likely to ease after eight consecutive years of growth, with occupancy rate forecast to fall below 80%, to 78.4%. That is partly why we expect Event's fiscal 2019 hotels EBIT to be largely flat. Longer-term, however, the picture is solid, with Dransfield forecasting 4.6% growth in revenue per available room and an occupancy rate of 79.7%.

We stick by our five-year EBIT CAGR forecast of 7% for the hotels division. That from a revenue CAGR of 6% (a slow-down from the furious 12% five-year historical average), but a midcycle EBIT margin 22.0%, higher than the five-year historical average of 17.4%, as the business begins to enjoy the operating leverage on an expanded portfolio (especially the eclectic QT brand) and inroads into higher-margin conference and events space.