Australia | Feb 29 2016
-Structural issues for distribution
-Should Gold Coast be doing better?
-Strong Asian theme park potential
By Eva Brocklehurst
Village Roadshow ((VRL)) disappointed brokers with a subdued outlook at its first half results, plagued by weakness in film distribution and poor weather in Sydney.
Structural issues faced by the distribution business highlight the significant trend towards digital channels. One which several brokers believe needs to be addressed. Meanwhile, cinema exhibition was very strong and theme parks are expected to continue to benefit from tourism demand.
With the exception of cinema exhibition, the results were weak and materially missed Macquarie's estimates. The broker believes the theme parks should also be performing better than they are, given the buoyant tourism conditions.
Australian box office revenue is up 3.0% year to date but coming in against some tough comparables over the next six weeks when it cycles Fast & Furious 7 and The Avengers: Age of Ultron. In view of this situation Macquarie revises down 2016 box office forecasts to a contraction of 4.0%.
Macquarie remains of the view that the portfolio is an enviable collection of leisure assets, and theme parks in Asia will likely be a material opportunity in the long term. The company added some detail to its plans for the Asian theme park strategy, looking to develop a product at a cost of $15-30m and generating a return in the high teens. The company is currently undertaking a search for a local partner.
Nevertheless, the upside is captured in the premium valuation and Macquarie does not envisage scope for this premium to expand until results can be consistently maintained. As a result the broker downgrades to Neutral from Outperform.
Bell Potter expects the cinema exhibition division will report record results but these are likely to be overshadowed by lower results from distribution and weather related issues for Wet 'n' Wild Sydney. Distribution continues to be affected by the structural shift away from physical DVDs with the extent of the decline even greater for Village Roadshow because of the nature of its content, Bell Potter maintains.
The broker acknowledges the company appears to be addressing the issue with a new marketing solutions division. Earnings estimates are downgraded by 8.0% for FY16 and by 15% for FY17, given the commentary.
Bell Potter, not one of the eight stockbrokers monitored daily on FNArena's database, has a $6.83 target and a Buy rating, which is predicated on the range of growth options available and the potential to unlock value. These include the stake in film production company, VREG, Asian theme park opportunities and land on the Gold Coast as well as The Edge loyalty business.
Citi likes the focus on the cinema business in the results and expects, if the company's strategy proves successful, that very strong growth will ensue. Theme parks are also expected to benefit from upside to Gold Coast tourism.
Theme parks and film distribution were short of Deutsche Bank's forecasts and the broker reduces near-term operating earnings estimates by 5-6%. While the company does not provide earnings guidance per se, commentary suggests Gold Coast theme parks will report growth in FY16.
Wet 'n' Wild Sydney looks to be in line in the second half, which suggests to Deutsche Bank earnings will be down around 10%. Cinema exhibition is expected to experience growth while film distribution earnings are expected to be lower.
To Ord Minnett the stock has probably sold off more than was warranted. The broker downgrades its expectations for FY16 by 9.0%. Yet, valuation and capital upside, along with the dividend yield, mean the broker takes the opportunity to upgrade to Buy from Accumulate.
In theme parks, the broker expects a margin of 30%, which implies growth in the second half of 12%. New attractions, a full period of membership sales and better weather should underpin the outlook for the Gold Coast assets.
In exhibition the broker finds it difficult to assess the second half trajectory but believes the line up is solid enough to mean a flat result is probable. The content, underpinned by Star Wars VII, supported the box office in the first half and the company's circuit continues to gain market share, the broker observes, thanks to Gold Class and Vmax.
The distribution segment has more than halved over the last three years and, while Ord Minnett believes the division will bottom out at some stage, there is no indication when this is likely to happen.
FNArena's database shows three Buy ratings and one Hold. The consensus target is $6.64, suggesting 18.6% upside to the last share price and compares with $7.80 ahead of the results. Targets range from $5.85 (Macquarie) to $7.05 (Citi). The dividend yield on FY16 and FY17 estimates is 4.7% and 5.4% respectively.
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