Turnaround Pending For Village Roadshow?

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Higher ticket prices, new attractions and the cycling of adverse periods have helped turnaround the theme parks division of Village Roadshow. How much of the improvement can be baked into the outlook?

-Ticket yields and admission revenue up strongly in January
-Australian box office sales expected to improve in the second half
-Risks from disappointing GC pass sales as Commonwealth Games coincides with holidays
 

By Eva Brocklehurst

January produced a significant recovery for the Village Roadshow ((VRL)) theme parks division after a soft first half. The company has indicated ticket yields are up 30% and admission revenue up 24% in the first weeks of 2018. Higher ticket prices, new attractions and the cycling of adverse periods have helped the turnaround.

Village hopes operating earnings will exceed the prior year, although much will depend on ticket sales in the key months of May and June. Several brokers upgrade the stock amid indications of an improving outlook and envisage upside risk to the Gold Coast's theme park performance.

Ord Minnett, upgrades to Hold from Lighten as the share price has moved into line with its target. Nevertheless, while positive about the developments in theme parks, the broker prefers to await more evidence of an extended recovery, given recent disappointments.

Citi upgrades, to Buy from Neutral. The broker accepts investors are cautious about buying the stock after a string of disappointing results but is more optimistic, based on theme park momentum, which has finally turned positive following the Dreamworld tragedy.

There is a strong movie program for the June quarter and the company's self-help initiative should be evident from FY19. Higher ticket prices, new attractions and the cycling of adverse periods have helped the turnaround, the broker believes.

Deutsche Bank found little to like about the result. Theme parks and cinema earnings fell and film distribution continues its steady decline. Sale and lease-back of the Gold Coast land is viewed as just swapping one form of debt for another, so leverage remains high.

The main positive was the ticket price rises, which were pushed through on the Gold Coast, but the test will be the annual pass renewals that occur over the second half.

Macquarie notes Sydney's Wet 'n' Wild is now loss-making and its performance suggests there are broader issues. While trends in attendances are expected to improve, the quantum of the price increase for Gold Coast theme parks – around 40% for an annual pass – and the strength of the Coaster "afterglow" are risks the broker highlights.

Cinemas

In the cinemas division results were soft, as earnings declined -26% because of a relatively weak film slate. The company is more confident about the outlook for the second half in cinema based on four blockbuster titles that are forthcoming. Ord Minnett is not so sure, and still expects cinema earnings to decline by around -6% in FY18.

Macquarie finds the company's capital structure more sustainable, with an improved balance sheet and corporate governance, upgrading to Neutral from Underperform. However, structural headwinds in the form of streaming services continue for the cinema exhibition segment.

The broker suggests that management's guidance requires a strong recovery in the second half. The penetration of “premiumisation” appears limited going forward and Macquarie estimates a -16% decline in FY18 cinema operating earnings.

Citi expects the Australian box office to accelerate in the June quarter, although the rebound could temporarily mask headwinds from discounting and sequel fatigue can, potentially, affect major releases.

The broker concurs that competition from alternative content sources and a decline in cinema visits by millennials creates a structural impediment. The company is embarking on a cost reduction program to remove duplicate back-office and support costs across its five operating divisions.

Commonwealth Games

While the Commonwealth Games on the Gold Coast may provide some optimism regarding second half earnings, Citi considers there is a risk from disappointing VIP pass sales.

The games overlap with school holidays in Queensland and Victoria and this could reduce the upside, as some tourists may be priced out of the Gold Coast if accommodation becomes too expensive.

The increase in ticket prices is a positive but Citi suggest it could drive away locals and negatively affect season pass sales in May and June 2018, which form 50% of theme park revenues.

FNArena's database shows three Hold ratings and one Buy (Citi). The consensus target is $3.54, signalling -0.1% downside to the last share price.

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