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Morningstar | Operating Prowess Evident in Event's Fiscal 2018 Result Despite Poor Cinema Showing

We lift our fair value estimate on Event Hospitality and Entertainment by 3% to AUD 13.00 per share, driven by higher-than-expected benefits of operating efficiency drive from the current transformation program.

While the 9% rise in fiscal 2018 normalised net profit after tax to AUD 124 million was 5% below our estimate, the miss was mostly due to lower-than-expected cinema earnings with combined EBIT from Australia, New Zealand, Germany theatres down 10% to AUD 98 million in fiscal 2018, below our AUD 105 million forecast. We view this as mostly cyclical and product-driven (that is, not enough popular movies), and remain confident of a high-single-digit earnings rebound in fiscal 2019. Furthermore, the decision to explore the sale of the German cinema unit (EBIT fell 8%) further underscores the importance of not extrapolating the poor cinema performance in fiscal 2018. Management flagged further details are expected by the fiscal 2019 first-half result on that front.

Management is increasingly turning to the hotels division for growth. Hotel revenue increased 10% year on year and EBIT increased 31%, driven by improvement in average room rate, revenue per available room, and occupancy rates across all brands. The group also unveiled grand plans for long-term development of various QT and Rydges sites, highlighting management's strategic priority.

Critically, benefits of operating efficiency are coming through, as reflected in the 170 basis point improvement in group EBIT margin to 15.4% in fiscal 2018, despite mere 1% top line growth. Progress on this front was the key driver of the slight increase in our fair value estimate.

Shares in no-moat-rated Event are trading at a 14% premium to our revised intrinsic assessment. The board declared a final fully franked DPS of AUD 0.31, unchanged from a year ago, bringing the full-year DPS to AUD 0.52.