Thursday, March 2nd, 2017
Last week we gained further perspective on the Australian tourism theme with weak results from Event (EVT) and Village Roadshow (VRL) and a mixed result from Mantra (MTR).
Although the leisure and entertainment sector benefits from the broader tourism tailwinds of Asia’s burgeoning middle class and our weaker dollar, these results prove that it’s not all ‘smooth sailing’. Capturing this investment thematic is still a challenge, and comes down to making selective investments based on bottom-up assessments of quality and value.
Event and Village Roadshow are recognised cinema brands, however both generate close to half their earnings from other tourism assets. EVT operates a portfolio of 5 hotel brands including QT and Rydges, as well as Thredbo Alpine Resort. VRL’s tourism assets include Gold Coast Theme Parks, the most well-known being Movie World, Sea World and Wet’n’Wild.
Mantra operates hotels in Australia, New Zealand, Indonesia and Hawaii and includes three core brands in Peppers, Mantra and BreakFree. We believe MTR has an attractive portfolio as demonstrated by increasing occupancy and average room rates and a strong resorts footprint in Queensland, which is capturing inbound tourism growth.
Event and Village Roadshow
At a glance, we don’t see compelling value in either EVT or VRL. Low growth is paired with price-earnings multiples of 18 times and 14 times respectively, and first half results suggest a tough operating environment and outlook. In particular, VRL needs to address its heavy debt load (Net Debt/EBITDA is 3.3 times) before it does anything else and the company is considering de-leveraging options including asset sales, cost outs, reduced capex, and/or reduced dividends.
The economics of EVT’s and VRL’s cinema operations are deteriorating, in part due to not only market saturation, but also strong competition from Hoyt’s, which has enjoyed a strong response to its recliner seating cinema refurbishment.
Over the last decade Australian cinema screen growth has crawled at 2% pa and at the same time cinema seat growth has declined due to conversions to accommodate increased premium seating. Revenue growth has largely come from ticket pricing, however average premium ticket prices peaked more recently. VRL is focusing on food and beverage to drive cinema revenues, but we find it difficult to reconcile how they’ll effectively execute this strategy given already inflated popcorn and soft drink prices. In summary, we believe it all points to operating de-leverage.
The EVT result was poor, with earnings in both Cinemas and Hotels divisions surprisingly down by greater than 10%. The German cinemas result was particularly disappointing, and brings into question EVT’s expansion strategy. Compared to other developed countries, Germany has both low cinema attendance rates and admissions per screen.
In contrast the Hotels result was affected by one-off factors earth quake damage to QT Wellington, a heavy round of refurbishments, and start-up costs at the recently opened QT Melbourne.
Figure 1. EVT 1H17 result summary
The VRL result was also disappointing, reflecting poorer conditions for film distribution, subdued Cinema results and negative flow on effects from the recent Dreamworld tragedy reflected in lower visitation at Movie World.
Figure 2. VRL 1H17 performance by segment
This brings us to MTR, which delivered a solid first half result and reiterated full year guidance. With regards to operational momentum, in the near term at least, MTR remains a story of two divisions: The Resorts division is ‘firing on all cylinders’ while the CBD division appears to be softening.
Headline revenues and earnings increased 16% and 15% respectively. Occupancy levels increased 3% to 82% while average room rates also increased 3% to $176.
Resorts operating earnings increased 30% off the back of 5% increases to occupancy rates and 3% higher average room rates.
Figure 3. MTR Resorts 1H17 performance
CBD operating earnings fell 5% to $26m, with 0.5% higher occupancy more than offset by a 2.1% decrease in average room rates. The result also demonstrated a geographical split, with strong performance from Sydney and Melbourne offsetting weakness in Perth, Brisbane and Darwin.
Figure 4. MTR CBD 1H17 performance
What we also found pleasing was Management’s commentary highlighted further potential for long term growth. CEO Bob East was upbeat on M&A potential, and MTR has ample balance sheet capacity to fund acquisitions. Aggregate demand continues to outstrip supply across the portfolio, in particular little new supply appears to be coming to MTR’s key resort locations.
We believe effectively capturing the broader tourism thematic comes down to evaluating selective investment opportunities based on bottom-up assessments of quality and value. We are watching MTR closely and believe value is beginning to emerge in what we see as a quality business.