Village Roadshow: Result 2013

An impressive result was expected from Village Roadshow. Hotter weather and a lower currency were to bring record numbers to its theme parks and exciting new film releases would boost cinema visitation. All that happened, but profits across its divisions were mixed.

Revenue increased 1% for the year to $936m, whilst net profit rose 8% to $57m. Earnings per share was 36.2 cents, from which a final 13 cent dividend was declared (fully franked, ex date 4 Sep), bringing the annual total to 26 cents, which amounts to a 4.2% dividend yield.

Better weather, and a lower dollar helped Village attract a record 5.4 million visitors to its Gold Coast theme parks over the past year, 15% more than in 2012. Operating profits though failed to rise, with divisional earnings before interest and tax (EBIT) falling 2% to $51m as a higher portion of ticket sales were multi-visit VIP passes, which reduces the average ticket price, and due to rising wage and utility costs. This remains a resilient business but we don't expect much growth from it.

The US water parks fared better. Divisional EBIT rose 9% to $2.5m – which included a $2m one-off expense relating to opening its new Las Vegas park. This division will contribute more in future periods.

Closer to home, the company's new Western Sydney water park is expected to open in early December, assuming Sydney doesn’t get any more unseasonably wet weather. The final costs are pegged to reach $125m-$130m and it will add more than $10m to EBIT in future years.  

Elsewhere, the Chinese joint venture, under which Village operates parks for a management fee without having to put up the capital to build or maintain them, is progressing nicely, with the Hainan Island Marine Park under construction and more parks being explored.

Cinemas shine

Cinema exhibition, though, was the star performer. Admissions crept up 1% to 25.9m. More pleasingly profits rose 17% to $45m as punters chose higher-priced premium cinemas and snacked on more popcorn and choctops.  

Village also distributes films and TV shows for Warner Bros, plus a number of other studios, such as Lionsgate which owns the Hunger Games series. Earnings fell 10% to $43m as the fall in DVD sales failed to be offset by a rise in digital sales. This remains a highly profitable business, but it's also the most vulnerable to technological change.

Rounding out Village's film trifecta is its 48% stake in the unlisted film production studio Village Roadshow Entertainment Group (VREG). Recent film releases such as The Great Gatsby and Gangster Squad have proved financial successes. It still plans to increase production from three to four films per year today to up to nine films per year. This would boost production to a level at which diversification can reduce risk but where VREG can still profit from one highly successful film (similar to a stock portfolio).

Village also owns US$100m of redeemable non-voting shares in VREG which receive an annual 5% cash interest payment and accrue at 9% until they mature in 2018. The preference shares appear increasingly safe, and Village might even receive a dividend from VREG if it produces a few financial hits.

The Village story has worked out far quicker than we expected, with the share price rising 63% since Village Roadshow: A profitable ride? from 06 Dec 12 (Long Term Buy – $3.80). Returns from here are likely to be far more subdued as the stock approaches the upper end of our valuation range. The share price has fallen slightly since No rush to sell Village from 14 Aug 13 (Hold – $6.31) and we remain happy to HOLD.