Given its exposure to cinemas and hotels, EVT Ltd (ASX:EVT) is considered one of the more attractive post-COVID recovery stories. With the shares now pulling back after solid gains since our recent report, is EVT still an investment opportunity at current levels?
About EVT Ltd
EVT Ltd (EVT – formerly Event Hospitality & Entertainment) holds a diverse portfolio of assets that includes cinemas, hotels and resorts, as well as property. The Company reports three divisions:
1. Entertainment: This division comprises cinema operations in Australia and NZ. EVT operates cinemas in Australia, NZ and Germany primarily under the EVENT brand.
2. Hospitality and Leisure: This division comprises Hotels and Resorts as well as the Thredbo Alpine Resort. The Hotels & Resorts business operates QT Hotels & Resorts, Rydges, Atura and Lylo brands (which are EVT brands), in addition to a suite of other brands that are managed by EVT.
3. Properties: EVT’s property portfolio, which includes a large number of hotels, was valued at $2.0b as at 30 June 2022. The earnings generated from the Company’s property assets are effectively low-risk rental income.
Key Fundamental Drivers
Earnings for Entertainment Division Sensitive to Film Line-Up
The performance of the Cinema operations is highly leveraged to the quality and timing of film title releases, where a comparatively weak line-up of films in any period can negatively impact performance.
With only two major films released in October and November, earnings for the Entertainment division in the first half of this financial year (1H23) are highly dependent on the Avatar: The Way Of Water, which was released on 15 December. The reason that the line-up of movie releases towards the end of 2022 is fairly thin, is because of the impact from COVID-19-related delays to production impacting the last 12-18 months. Film producers have also been pushing back release dates to avoid competition with Avatar: The Way Of Water – as the original Avatar is the highest grossing film of all time.
Resilience in Cinemas Supports Premiumisation Strategy
Cinemas have historically shown resilience to economic downturn and this is expected to remain the case should present cost of living pressures continue to increase. This factor has allowed the Company to progress its premiumisation strategy. This has driven spend per head over the last ~2 years, as more customers are choosing premium experiences. At present, approximately 25% of cinema screens are classified as premium, with the Company aiming to increase this target to 60%.
This trend drove record growth in average admission prices in FY22 (+17.7% on pre-COVID levels for the Australian business). In addition, customers are spending more each visit with record levels of spend per head being achieved (+48.9% on pre-COVID levels for the Australian business). EVT Germany operations also reported growth in all key metrics for FY22: Average admission price up 5.3% and spend per head up 29.4% on FY19, every month a spend per head record.
EVT Has Levers to Mitigate Risk from an Economic Downturn
There is a risk that the premiumisation trend that has taken place over the last decade, which has resulted in higher ticket prices (+18% from 2011 to 2021) and food & beverage prices, could leave the business exposed to consumers trading down to lower-priced formats or competitors, or consuming more content at home.
One potential offsetting factor to this is that the Company has an advantageous rental/lease profile. It is estimated that around 2/3rd of EVT’s Australian cinema leases may have a turnover clause. This rate is much lower than other retailers and protects EVT, as any material ticket price rises that may stem from inflation or the premiumisation of cinemas is less likely to result in higher rents.
In addition, it is estimated that ~40% of EVT’s CPI-linked leases increase with CPI on a review year. This typically means there are 3 to 4 years of no rental increases between each review year. This places EVT at a competitive advantage, as EVT’s landlords may only manage to put through one rent increase for leases with CPI-linked escalations. In contrast, many specialty fashion retailers with greater exposure to annual CPI escalations may face greater pressure from landlords given that CPI is expected to approach the RBA’s target band of 2-3% by the end of calendar year 2024.
Recovery for Hotels Division Continues
For the FY23 period to date, the Hotels portfolio continues to outperform competitors and that the division is recovering well. The Hotels division generated positive EBITDA of $21.3m, up 5.7% on 1Q19 (i.e. pre-COVID levels). This was a pleasing result given the current closure of Rydges Melbourne for upgrade works and recent non-core property divestments.
The outlook for the Hotels division remains largely reliant on a full return of international travel, which the Company expects will occur in FY24. International arrivals are currently tracking at ~60% of pre-COVID-19 levels, although elevated room rates should continue to be an offsetting factor in the short-term.
Further Divestments Expected to Lower Gearing & Support Capital Management
The Company has historically maintained a strong balance sheet. It typically prefers to pursue opportunistic acquisitions of complimentary leisure assets and to maintain a high dividend payout ratio of 60-80% of fully franked dividends. This is opposed to capital returns or share buybacks.
EVT reported gearing (on a net debt to equity basis) of only 23% as at 30 June 2022. The balance sheet is also supported by property assets worth $1.28b (or ~50% of total assets). The current gearing level is well down on the FY20 level of 43%, which is a positive from the viewpoint that it provides the Company with balance sheet flexibility should it proceed with two developments in Sydney and planned CAPEX over the next 3-5 years (including QT Canberra, Rydges Queenstown and Thredbo Golf Course).
Given the pullback in the shares price, EVT’s multiple has only slightly increased since our recent report, to ~23x. At current levels, we still consider EVT to be a solid recovery story, as the current multiple appears undemanding in the context of forecast EPS growth forecasts of +46% over FY22-25 on a CAGR basis. While there is a fair degree of uncertainty associated with this rate of expected EPS growth (given that the recovery in earnings is largely dependent on external factors), it nonetheless points to a strong recovery in earnings once the film line-up and full international travel both normalise.
EVT has been in a large corrective pattern for over a year. It has recently bounced off support and in the short-term it looks like heading back up to retest the downtrend line near $15. If we see an upside break beyond $15-$15.50, then that would be the next buying opportunity. However, if we see EVT fall under $12.50, then that would be a negative.
Michael Gable is managing director of Fairmont Equities.
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