EUR 850.00 For Business Accounts Only

Morningstar | Too Busy in the Village. See Updated Analyst Note from 10 Jun 2019

Negative market reaction to Village Roadshow's strategy presentation on June 7, 2019 has narrowed the stock price's premium to our unchanged AUD 2.50 fair value estimate to 20%. That is a far cry from the recent AUD 3.86 high, buoyed by market's overexuberant recovery expectations.

Near term, we expect group fiscal 2019 EBIT to triple year on year to AUD 61 million, as the momentum in theme park earnings rebound accelerates and the reduction in corporate costs continues. However, much of this was already baked into consensus thinking and continuing soft showings from Topgolf, film distribution, and marketing solutions are putting some fresh drag on the overall recovery.

Longer term, nothing from the strategy day necessitated a change to our intrinsic assessment of the no-moat-rated group. In fact, management's characterisation of fiscal 2020 as a "consolidation" year may tamper the thinking of some investors expecting a steep recovery trajectory. What the management presentations did confirm is that theme parks and cinema exhibitions are the ONLY units that matter in the hodge-podge of a conglomerate that is Village. These divisions account for 90% of group earnings before corporate costs, and the precious little time that management spent on Topgolf, film distribution, and marketing solutions makes one wonder (again) why Village is wasting valuable financial and executive resources on these perennially underperforming operations.

Management appears fully aware of this. During the strategy day, a laser-like refocus on theme parks and cinema exhibition was consistently reiterated, as were promises of more disciplined operating and capital expenditures in the future. However, proof is in the pudding. Our scepticism remains as to whether the full earnings and cash flow power of the two core "going-out, experience" divisions can ever be realised, while Village persists with "growth" aspirations which have come to very little to-date.

A tour of Seaworld abundantly shows why it is a key part of theme park division's future growth story. Despite the lack of thrill rides (just two, down from seven over the past decade), 1.4 million people still flock to the property a year, albeit down from 1.7 to 1.9 million prior to the Dreamworld tragedy in October 2016. If those sea animals and low capital expenditure attractions such as Sea Jellies and Carnivale can still entice this many people, one can only imagine how much of a boost the AUD 50 million Atlantis precinct (with three massive new thrill rides) will provide as it gradually comes to life over fiscal 2020 and 2021. Furthermore, the impressive 90% occupancy rate at the Sea World Resort demonstrates the benefits of a hotel next to a theme park. It points to the upside potential from developing an accommodation property next to Village's Movie World theme park, one that is definitely not lacking in thrill rides, headlined by the 1.4-kilometre DC Rivals Hypercoaster experience on which this author had trouble keeping down his lunch.

Even without factoring in a hotel next to Movie World but buoyed by a more disciplined ticket-pricing structure overall, we currently expect the theme park division to deliver an EBIT CAGR of 12% until fiscal 2023, from our forecast AUD 32 million in fiscal 2019 and a Dreamworld-impacted loss of AUD 8 million in fiscal 2018. And this is despite our subdued view of Topgolf whose EBITDA is now tracking just over AUD 3 million per year and unlikely to improve much from that level, down from management's AUD 5 million forecast less than four months ago.

As for the cinema exhibition division, we remain comfortable with our five-year EBITDA CAGR forecast of 7%. That equates to revenue CAGR of around 3% (in line with the eight-year historical average) and midcycle EBIT margin 16.5%, down from eight-year historical average of 17.5%, taking into account the likely marketing and operating response to structural headwinds facing the business from proliferating digital entertainment alternatives (for example, streaming and movie-like gaming). Management's investment and refurbishment plans for the division (new sites, more Gold Class seats, state of the art food/beverage and dwell areas) certainly entrenched our comfort in these long-term forecasts. Furthermore, the upcoming "tent-pole" film slate looks impressive, headlined by the ever-popular Toy Story, Lion King, and Spiderman franchises, ones that will no doubt drive sales of relevantly themed but ridiculously priced popcorn/candy packages.

In terms of the potential for dividend reinstatement, our sense is the board is likely to hold off until fiscal 2020. On our forecast, Village is likely to end fiscal 2019 with net debt/EBITDA of 2.0, right on management's target. As such, we expect the resumption of dividends from fiscal 2020 at AUD 0.06 per share, a 39% payout that would see the group releverage up to 2.4 by the end of fiscal 2020. All this is, of course, assuming Village desists from pursuing any further grandiose growth ventures via acquisitions. While hindsight is always wise, recent disappointments (Wet 'n' Wild Sydney, Wet 'n' Wild Las Vegas, Roadshow production, Topgolf, marketing solutions) have severely tested our patience. Management resources could be better utilised optimising the performances of theme parks and cinemas.