EUR 850.00 For Business Accounts Only

Morningstar | EVT Updated Star Rating from 23 Oct 2018

We retain our AUD 13.00 per share fair value estimate for Event Hospitality and Entertainment, following the group's decision to offload its German cinema unit. On a pro forma basis, we calculate the AUD 210 million sale to be 8% EPS-dilutive, improving to 6% if the German cinema market improves in 2019 to trigger an additional payment to Event (up to another AUD 148 million). The earnings impact is insufficiently material to alter our intrinsic assessment for Event, especially as the proceeds will be reinvested in various expansion projects under consideration.

Still, the planned exit from the German cinema industry is positive for two reasons. Financially, it will purge a business characterised by significant volatility in EBIT which reached as high as AUD 34 million in fiscal 2016, but crashed to as low as AUD 13 million in fiscal 2014. The volatility was on full display in the recent September-quarter, with the unit mainly responsible for Event's 27% year-on-year decline in group EBIT for the period, due to a 20% slump in the Deutsche box office.

Strategically, the proceeds from the sale will not only free up management time, but also shore up an already healthy balance sheet--one that ended fiscal 2018 with net debt of just AUD 282 million, or net debt/EBITDA of 1.1. The AUD 210 to 358 million inflow from the German sale will tip the balance sheet into a net cash, putting Event in a strong position to pursue an array of property redevelopment opportunities. It will also provide flexibility to further invest/upgrade Event's hotel division, one that has earned the right to be allocated more capital, having generated EBIT CAGR of 27% in the past five years (versus group EBIT CAGR of 10%).

The optionality of these projects could explain why shares in no-moat Event are trading at a 9% premium to our fair value estimate. However, we remain comfortable with our intrinsic assessment, pending management's decisions on which expansion projects it will pursue.

Our forecasts currently do not incorporate any redevelopment upside. Management itself is currently in the evaluation stage. And there is no shortage of projects to evaluate, with some key ones being: (1) the 458-472 George Street Sydney properties which were bought for AUD 116 million in May 2017. Event is considering expanding these properties to include retail, an extension of the adjacent QT hotel, encompassing conference and events facilities, as well as a commercial tower in a joint venture with a partner; (2) the 525 George Street Sydney property (currently part of the George Street cinema complex) being considered for redevelopment as a mixed-use cinema, residential and hotel development; (3) a potential expansion of Rydges Hotel in Melbourne; (4) incremental development at Thredbo to increase capacity; and (5) a potential mixed-use cinema, hotel and residential development at 100 Cable Street in Wellington New Zealand, adjacent to the current QT Wellington hotel.

As for details of the German cinema unit sale, Event has agreed to sell the business to Vue International for an upfront payment of EUR 130 million, or AUD 210 million. To shield shareholders from the risk of selling at the bottom of the earnings cycle, management has also negotiated a variable consideration of up to EUR 92 million, or AUD 148 million, if the German box office admission market improves in 2019. Our 8% EPS dilution estimate on the initial AUD 210 million upfront receipt stems from the fact the AUD 20 million EBIT lost from the German operation more than offsets the estimated AUD 6 million reduction in interest expense from the proceeds initially used to pay down debt. Finally, the transaction is still subject to competition authority approval in Germany. As such, we have not yet formally reflected the sale in our forecasts.