EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: Take Up Village Roadshow’s AUD 1.65 Retail Entitlement Offer Before July 26, 2018

We recommend that eligible shareholders subscribe to Village Roadshow’s nonrenounceable 5-for-26 shares retail entitlement offer at the fixed price of AUD 1.65 per share. The closing date is July 26. The offer price is 12% below the current stock price and 34% below our AUD 2.50 fair value estimate. Our intrinsic assessment already incorporates the AUD 50 million capital raising, which will support Village’s balance sheet.

With a net debt/EBITDA metric approaching 4 times by the end of fiscal 2018, a capital raising was always a possibility. We had believed such an exercise could be avoided, given an anticipated recovery in Village's core operations from fiscal 2019 (especially in theme parks) and the effects of recent asset sales. However, the group's lenders clearly thought otherwise, culminating in the AUD 1.65 per share entitlement equity raising, at a heavy 20%-plus discount to the predeal stock price.

We forecast this capital raising and vastly reduced capital expenditures (from AUD 87 million in fiscal 2018 to AUD 50 million the following year) to cut Village's net debt/EBITDA to 2.7 times by the end of fiscal 2019. This will also be driven by an estimated 23% lift in fiscal 2019 EBITDA to AUD 110 million, which is still substantially below the historical five-year average of AUD 146 million.

Village's current predicament is also hopefully a wake-up call for management to adopt a more laser-like focus on costs. Plans to eliminate AUD 10 million in corporate/overhead expenses are encouraging, including the promise to cut directors' fees by 25%, which will save AUD 1 million a year alone. Initiatives to improve operating efficiencies in the theme parks division are also long overdue, given the decline in EBIT margin from 19.4% in fiscal 2012 to 11.8% in fiscal 2016 even before the Dreamworld collateral damage hit from fiscal 2017. The time has come for management to deliver on all these promises, while eschewing any more so-called "growth investments".