Australia | Apr 26 2017
Gold Coast theme parks have been inundated with negatives from the Dreamworld tragedy to the weather and Village Roadshow downgrades earnings expectations for its attractions.
-Weakness in international and interstate markets also noted
-Significant level of gearing but poor earnings momentum observed
-Brokers require evidence of progress on promise of asset sales
By Eva Brocklehurst
The tragedy at Ardent Leisure's ((AAD)) Dreamworld theme park has had ramifications for rival Village Roadshow's ((VRL)) Queensland parks. Coupled with unfavourable weather stemming from Cyclone Debbie, this has led to a sharp reduction in attendance.
Total attendance at the Gold Coast parks is down -9.4% for the nine months to March 31, with an acceleration observed in the rate of decline over March and April. Operating earnings (EBITDA) guidance of $55-65m has been issued for the theme parks in FY17. The company did not provide trading updates on its other divisions.
Village Roadshow also noted a decline in membership renewals over March. Membership passes were recently introduced as an alternative to VIP passes and are skewed towards the local market. Moreover, the company expects the Sydney Wet'n'Wild park to underperform in the second half. Village intends to use the introduction of new attractions and marketing to return visits to its theme parks to normal levels.
While the company has signalled weakness in the local market, which makes up 50% of visitors, Citi also envisages risk to the international and interstate markets, as Gold Coast hotel occupancy has now declined for six months.
Citi expects theme parks will report a loss of -$8m in the second half, down -138% on the second half of FY16. The upcoming Commonwealth Games may provide some optimism about the FY18 outlook but this could still be affected by membership cancellations and disappointing VIP pass pre-sales.
In terms of the company's box office, second half sales are up 5% so far and Citi expects this to accelerate throughout the June quarter, driven by a number of major releases. The broker considers Village is the cheapest stock in the leisure set, trading on undemanding multiples but remains concerned about increased risks around cinema exhibition, theme parks and film distribution segments.
Needs To Improve Confidence
The reduced earnings outlook increases the pressure on the company to successfully execute on asset sales to meet its net debt/operating earnings target of under 3.0. After three downgrades to earnings estimates since November's AGM, Citi believes increased disclosure around bank covenants is required to improve investor confidence.
The broker envisages potential for the stock to re-rate should the company successfully execute on its asset sales and deliver on cost savings. Deutsche Bank follows a similar theme, noting the weakness in the core local visitor market, particularly at the end of the summer holidays, and reduces its forecast for operating earnings to the low point of guidance, which results in a reduction to FY17 estimates of -13%.
The broker highlights a significant level of gearing, especially in a business with poor earnings momentum. Management has said it is pursuing asset sales but, the broker asserts, progress is yet to be communicated to the market.
Macquarie does not believe valuation alone is a catalyst to buy the stock, retaining a Neutral rating, and considers the focus on reducing gearing, stated at the first half result, is an overdue positive. The company has nominated to undertake this via a dividend reduction and asset sales but no further detail has been provided and this broker also wants a detailed plan around asset sales and cost savings.
FNArena's database shows one Buy rating and three Hold. The consensus target is $3.83, suggesting 2.1% upside to the last share price. Targets range from $3.38 (Macquarie) to $4.63 (Ord Minnett, yet to comment on the update).
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