EUR 850.00 For Business Accounts Only

Morningstar | Set for a Village Rebuild

Village Roadshow's fiscal 2018 result contained no surprises. The 33% slump in EBITDA to AUD 91 million and the AUD 7 million normalised net loss were both in line with our expectations. This is just as well, given that it was only six weeks ago management provided earnings guidance as part of disclosure to raise AUD 50 million from shareholders.

This is an exercise that has provided much-needed relief to the balance sheet, which ended fiscal 2018 with an alarming net debt/EBITDA of 3.7 times. We project this leverage metric to fall to 2.5 times by the end of fiscal 2019, driven not only by the equity raising in July but also a material reduction in forecast capital expenditure (to AUD 51 million, from AUD 85 million in fiscal 2018). Furthermore, there is no change to our substantial 26% forecast lift in fiscal 2019 EBITDA to AUD 114 million--a level that is still substantially below the historical five-year average of AUD 147 million.

We see operating performances in fiscal 2019 to date as supportive of our recovery assumptions. First, yield on theme park ticket sales is up 35% in July from a year ago, accelerating from the 16% growth in the June-half. This is an encouraging sign of a more rational pricing environment on the Gold Coast, with aggressive discounting finally dissipating. Second, the new TopGolf venue is on track to contribute AUD 5 million in EBITDA in fiscal 2019. Third, three recently-opened cinemas will boost earnings, further aided by a better film slate. Finally, we see collateral damage from the Dreamworld tragedy receding, albeit gradually, with our fiscal 2019 theme parks EBIT forecast of AUD 15 million still materially below the normalised five-year average of AUD 50 million.

Shares in no-moat-rated Village are trading at a 10% discount to our unchanged AUD 2.50 fair value estimate. While balance sheet fears are largely gone, scepticism over management's ability to steer a meaningful earnings recovery appears to be lingering.