Selling Village Roadshow

Village Roadshow's share price has increased 114% since our original upgrade in Village Roadshow: A profitable ride? from 06 Dec 12 (Long Term Buy – $3.80). The company has also paid 52 cents of dividends and a capital return of 25 cents for a 77% annualised return over the past 18 months.

These returns reflect Village's improved business performance. Cinema visitation has increased, the new Wet ‘N’ Wild theme park in Sydney looks like it will be a success and the company's theme park expertise has led to several management contracts in China. Even Village’s struggling film production business is showing promise with recent successes The Lego Movie and The Great Gatsby.

In stark contrast to years gone by where long-term managing director Graham Burke has been accused of ignoring shareholders, the company has been very shareholder friendly. Dividends have been increased (to 26 cents in the past year) and excess capital has been returned. It's no surprise the share price has more than doubled.

Margin of safety

At less than $4 per share you were buying a cheap basket of stable businesses with recurring revenue streams that we expected to grow moderately over time. You were also potentially getting future expansion and the cinema production business for free. A classic situation of heads we win, tails we don’t lose too much. With the share price currently around $8, a large part of those options have been priced in to Village's share price which means they're no longer free.

For example, Mr Market was formerly ascribing no value to the film production business. At current prices we'd estimate that it's being valued at over $250m. Limited transparency – this investment is held off the books due to Village's minority stake – means it’s hard to gauge how much, if anything, this business is worth. We were willing to bear the unknown when it was free but as the share price rises the film production business makes up an increasingly large and more risky part of the valuation. This division could end up being worth well in excess of its current implied value but it's a guessing game, particularly without access to the division's accounts.  

Most of Village's assets are also mature so we don't expect them to grow rapidly. And new theme parks will require large chunks of capital. Weighing it all up we've decided to take advantage of Mr Market's enthusiasm to lock in our profits. While there's a case to hold on if you believe the film production business will shoot the lights out or the company will be able to invest at high rates of return by opening new theme parks, for example, there's little margin of safety at a price-to-earnings ratio of 18.

The share price has increased 10% since Village Roadshow: Interim result 2014 (Hold – $7.25) from 14 Feb 14 and we're downgrading to SELL.