EUR 850.00 For Business Accounts Only

Morningstar | Village on Road to Show Recovery. See Updated Analyst Note from 22 Feb 2019

Earnings recovery at Village Roadshow has well and truly begun, with fiscal 2019 first-half EBIT doubling from a year ago to AUD 30 million. This was led by the theme park division where EBIT almost tripled to AUD 18 million, from a Dreamworld tragedy-affected prior period. The improved attendance on the Gold Coast properties since December 2018 shows improving patron sentiment. It also vindicates management's decision to pursue a more disciplined pricing strategy and let the quality of theme parks speak for itself after an extended period of (perhaps a little too excessive) investment in attractions.

Cinemas also contributed to the recovery, with EBIT up 22% year on year to AUD 16 million. The unit not only rode the coattail of a strong box office environment but also reaped the benefits of a more dynamic ticket pricing strategy and leveraging the loyalty reward program.

The earnings recovery manifested itself in a much-improved balance sheet. Net debt was cut by AUD 122 million in the half to AUD 216 million, with net debt/EBITDA now down to 2.0, aided further by AUD 50 million from the recent capital raising and AUD 37 million from the sale of Wet'n'Wild Sydney. Hopes of dividend reinstatement are rising, and we maintain our DPS expectation of AUD 0.06 in fiscal 2020.

However, this earnings recovery had already been baked into our thinking. In fact, our operating earnings forecasts are largely unchanged, save for some compositional adjustments (upgrade to near-term theme park earnings, cuts to film distribution). As such, we maintain our AUD 2.50 fair value estimate.

Shares in the no-moat-rated group are trading at a material premium to this intrinsic assessment. We understand the market's enthusiasm for a company on a clear recovery path to restoring earnings and dividends. However, our valuation has always been based on what we believe to be Village's sustainable, midcycle earnings.

Our current estimates show a five-year group EBIT compound annual growth rate of 34%, reaching AUD 88 million by fiscal 2023. This is in line with Village's three-year average of AUD 86 million before the depth of a Dreamworld-affected fiscal 2018 where EBIT slumped to AUD 20 million. We see theme park EBIT recovering to AUD 51 million in five years' time, up from an AUD 8 million loss in fiscal 2018; cinema EBIT at AUD 59 million in five years' time compared with AUD 41 million in fiscal 2018; and film distribution EBIT at AUD 13 million in five years' time versus AUD 11 million in fiscal 2018. These estimates looked wildly optimistic when Village was in the depth of its earnings hole just a year ago. Now, some may see them as conservative (obviously not us).

As for the details of the result, normalised net profit after tax came in at AUD 13 million, up from break-even a year ago. There was again no dividend, which has been suspended since fiscal 2017, although the board stated that it "intends to reinstate dividends at the full year if performance continues to meet expectations." We continue to forecast no dividend in the second half but assume AUD 0.06 in fiscal 2020, noting that some of that amount may be brought forward to the second half of fiscal 2019.

In terms of divisions not mentioned above, film distribution EBIT fell 23% year on year to AUD 7 million. The business continues to suffer from structural challenges as demand for physical DVDs gives way to the insatiable appetite for digital streaming of content. Marketing solutions EBIT dropped to AUD 1 million from AUD 3 million a year ago, affected by less promotional activity.

The recently launched Topgolf business on the Gold Coast delivered EBIT of just AUD 2 million, or AUD 3 million in EBITDA. This was below expectations and management conceded it is still in the "proof of concept" stage. Consequently, it has stepped away from previous target of exceeding AUD 5 million in EBITDA for fiscal 2019, albeit AUD 5 million EBITDA is still possible.