The share price of Event Hospitality & Entertainment (ASX:EVT) in has fallen during the month of June. Here we have a quick look at the fundamentals underpinning the company and where we think support is likely to come in on the chart for those investors looking for a buying opportunity.
About Event Hospitality & Entertainment
EVT, formerly Amalgamated Holdings is a company that holds a diverse portfolio of assets that includes cinemas, hotels and resorts, as well as property. The Company reports three divisions: Entertainment, Hospitality and Leisure and Property. The first two being the key operating divisions; and the earnings generated from the property portfolio (largely comprising hotels) effectively low-risk rental income.
Entertainment comprises cinema operations in Australia, NZ and Germany. EVT operates cinemas in Australia and NZ primarily under the EVENT, Birch Carroll & Coyle and GU Filmhouse brands, and in Germany under the CineStar brand.
The Hospitality and Leisure division comprises Hotels and Resorts as well as the Thredbo Alpine Resort. The Hotels & Resorts business operates QT Hotels & Resorts, Rydges Hotels & Resorts, Atura Hotels brands. It is estimated that QT and Rydges each generate around 45% of earnings for Hotels and Resorts, with Atura generating around 10%.
The recent interim result for the six months to 31 December 2017 (1H18) underlined the benefit of the Company’s diversified portfolio. It showed strong results from the Hotels and Resorts, Thredbo and Entertainment Germany divisions. They were offsetting the impact of a comparatively weak film line-up on the Entertainment results in Australia and NZ.
Some Strong Fundamentals for EVT
There are a number of factors supportive of EVT’s fundamentals, including:
i)A solid earnings outlook for EVT’s Hotels & Resorts business, which is significantly outperforming its peers. This is with EVT reporting 8.9% growth in Revenue per available room (RevPAR) in 1H18, well above the 2-3% reported by the overall Australian Hotel market. This trend is expected to continue, as EVT has a strong exposure to the Sydney Hotel market (~25% of EVT’s owned rooms), which is generally experiencing strong demand. This due to a relative lack of supply. They also have a relatively low exposure to the Melbourne Hotel market (~15% of EVT’s owned rooms), which is experiencing reduction in demand due to new supply.
ii)A balance sheet characterised by minimal (or no) gearing, which, coupled with strong operating cashflow, supports development and dividend payments
iii)A significant property portfolio that generates low-risk income
Can the positives overcome the challenges in Cinema Operations?
However, the key reservation we have with EVT in the earnings visibility for the Cinema business in Australia and NZ. This division is highly leveraged to the quality and timing of film title releases and is therefore only really visible over a period of less than 12 months.
Further, after EVT experienced market share loss in NSW and QLD in FY17 due to discounting, key ASX-listed competitor Village Roadshow (ASX:VRL) recently commented that it is facing continuing challenging trading conditions in its Cinema operations. EVT is attempting to mitigate the impact from these factors, as well as reducing the lumpiness in divisional earnings (which are highly leveraged to film titles). It is doing this by focusing on premium cinema locations and opening new cinemas – and it is too early to tell whether the Company is having any success in this regard.
In context, the Entertainment division comprises ~40% of group earnings, hence we consider this to be a key investment risk, especially given that the shares are currently trading on a 1-year forward P/E multiple of ~17x. This is at a premium to its EPS growth profile of ~10% and ~4% for FY18 and FY19, respectively.
As noted above, we consider that earnings from Cinema operations in Australia and NZ have the potential to be better than expected, although the extent of such a recovery indicates a partial, rather than significant, improvement (and hence positive surprise).
Can EVT shares get cheaper?
When we look at the chart, we can see the potential for the shares to get cheaper in the short term. From the lows in early 2017, EVT has gone to form a series of higher highs and higher lows. However, if we take into consideration the previous price action, it looks like EVT could be forming a pennant within a downtrend. Price action in the last month has been negative, bringing the shares back to support. Investors should keen an eye on this level, if it breaks then EVT is likely to fall towards $11 and therefore offer a better entry point than current levels.
Michael Gable is managing director of Fairmont Equities.
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