Village Roadshow Must Bank Sully, as Shares 30% Undervalued

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

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Morningstar, Inc.

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Equity Bottom-Up

While no-moat-rated Village Roadshow's fiscal 2017 result was largely in line with our expectations, earnings quality was sub-par. The 10% fall in cinema EBIT to AUD 60 million was 6% shy of our estimate. This is disappointing, given the importance of what should be a resilient unit, at a time when the group is under severe balance sheet and earnings pressures in other areas.For instance, theme parks EBIT slumped 86% to AUD 5 million, owing to the sentiment impact from the October 2016 Dreamworld tragedy. Film distribution EBIT also dropped 16% to AUD 18 million, marking the fifth consecutive year profits have fallen.The headwinds to these businesses, and the uncertain timing of their recovery, are such that we have cut our EBIT estimates by an average of 6%, resulting in an 8% reduction to our fair value estimate to AUD 3.60 per share.<div class="content-highlight">Critically, these earnings pressures have pushed the group into a precarious financial position, with net debt/EBITDA ending fiscal 2017 at 3.9 times. While management reiterated that Village remains in compliance with its debt covenants, we cannot overemphasise the importance of executing the AUD 175 million sale of the 50% interest in the Singapore cinema venture--a deal that appears to have hit a snag with the original buyer. Given management's apparent confidence in completing this transaction, we still incorporate the proceeds in our modelling. As such, we forecast net debt/EBITDA to fall to a more comfortable 2.3 times by year-end fiscal 2018, with dividends reinstated at AUD 0.08 per share.</div>Analyst: Brian Han

While no-moat-rated Village Roadshow's fiscal 2017 result was largely in line with our expectations, earnings quality was sub-par. The 10% fall in cinema EBIT to AUD 60 million was 6% shy of our estimate. This is disappointing, given the importance of what should be a resilient unit, at a time when the group is under severe balance sheet and earnings pressures in other areas.For instance, theme parks EBIT slumped 86% to AUD 5 million, owing to the sentiment impact from the October 2016 Dreamworld tragedy. Film distribution EBIT also dropped 16% to AUD 18 million, marking the fifth consecutive year profits have fallen.The headwinds to these businesses, and the uncertain timing of their recovery, are such that we have cut our EBIT estimates by an average of 6%, resulting in an 8% reduction to our fair value estimate to AUD 3.60 per share.Critically, these earnings pressures have pushed the group into a precarious financial position, with net debt/EBITDA ending fiscal 2017 at 3.9 times. While management reiterated that Village remains in compliance with its debt covenants, we cannot overemphasise the importance of executing the AUD 175 million sale of the 50% interest in the Singapore cinema venture--a deal that appears to have hit a snag with the original buyer. Given management's apparent confidence in completing this transaction, we still incorporate the proceeds in our modelling. As such, we forecast net debt/EBITDA to fall to a more comfortable 2.3 times by year-end fiscal 2018, with dividends reinstated at AUD 0.08 per share.Analyst: Brian Han

Pressure All Around Village Roadshow; FVE Cut 8% to AUD 3.60 Per Share