PT 3.40

Morningstar commentary
We downgrade our fair value estimate for no-moat-rated Village Roadshow to AUD 3.40 following a weaker than expected third-quarter trading update and profit guidance downgrade. We weren’t surprised by the suffering in the theme parks and film distribution businesses, and we had already anticipated fiscal 2018 to be a "write-off" year for the company. However, we are concerned by the weakness in Cinema Exhibition, the company’s second pillar of earnings growth. We cut our estimated fiscal 2018 underlying net profit after tax to a loss of AUD 10 million from a profit of AUD 13 million previously, further pushing out the forecast earnings recovery. The theme park unit continues to struggle with subdued attendance since the Dreamworld tragedy in 2016, and management now expects a lower EBITDA in fiscal 2018 than last year. The decline in foot traffic on the Gold Coast during the Commonwealth Games, worsened by dismal March weather, was greater than we had thought. However, we view the poor performance as largely driven by one-off factors, and trading is poised to recover in time. Film distribution has been underperforming for many years, and we still expect fiscal 2018 EBIT to be below last year’s. As with theme parks, we forecast a modest recovery in film distribution earnings from fiscal 2019. We expect upcoming potential blockbusters "Avengers: Infinity War", "Deadpool 2", and "Solo: A Star Wars Story" to revive the cinema division’s earnings in fourth-quarter fiscal 2018. The popularity of these films will ultimately determine the magnitude of the fall in earnings. Despite these disappointments, our long-term estimates are unchanged, and we still see a recovery from fiscal 2019. This is reflected in our five-year EBIT CAGR forecast of 10%, as theme parks gradually rebound and cinemas overcome the recent poor run of box office performance. We see Village’s shares as undervalued, trading at a 21% discount to our revised fair value estimate.