‘Pay no attention to the man behind the curtain,’ screamed the Wizard of Oz’s giant green head as fire balls erupted and menacing plumes of smoke formed around it. Unfortunately for the wizard it was too late. The falling curtain had revealed the far-less impressive reality to Dorothy and her friends of an ordinary man rather than an all-powerful wizard. The illusion was shattered.
Reporting season can sometimes feel a little bit like that scene from the Wizard of Oz. Companies release announcements with ripper headlines, only for the real picture to emerge sometime later, once the detail has been digested.
It’s rather fitting that Event Hospitality and Entertainment (ASX:EVT), no stranger to Hollywood tales, has fallen victim to this storyline. Its results announcement was simply titled ‘Record profit for EVENT’. That claim is completely accurate, but when you look into the reasons for it the wizard morphs into an ordinary man.
Around 65% of the company’s operating profit comes from its cinema businesses in Australia, New Zealand and Germany. Event managing director David Seargeant admitted that ‘the cinema business benefitted from a strong line-up that included Star Wars: The Force Awakens, the surprise hit Deadpool and the Bond film Spectre’. In fact, according to Boxofficemojo.com the 2016 financial year included 15 of top 100 grossing films of all time.
It was inevitable in what was arguably the movie business’s most successful year ever that Event’s profit would surge. The operating profit of the cinema businesses increased by more than 20% in 2016 and return on assets was also higher than usual. But extrapolating last year’s profit into the future would be a mistake. Event has no control over what movies Hollywood releases or how successful they will be.
So far the 2016/17 year has been disappointing. The Ghostbusters remake only grossed $217m at the box office, far below the $300m considered to be the film’s breakeven point for Sony and Village Roadshow’s (ASX:VRL) production company. Even Disney has struggled, with Alice through the Looking Glass and The BFG disappointing. If this trend continues, don’t expect the headline on Event’s next full year results to be so triumphant.
The lesson is to not take the headlines at face value. Over time, luck will even itself out and the business fundamentals will come to the fore. Event is a profitable business but it isn’t always going to be as profitable as it was in 2016 and should not be treated as such.