Divesting 525 George Street Will Fund Future Growth Initiatives

Key Takeaways

• Divesting the 525 George Street site is expected to unlock capital for growth and may lead to a special dividend impacting shareholder returns.
  
• Strong performance in the Hotels division, with refurbishments and new projects, is poised to increase occupancy and drive revenue growth.
  
• EVT faces revenue and profitability risks across its divisions due to film supply disruptions, weather impacts, market uncertainties, fixed costs, and potential refurbishment expenses.

Catalysts

Engages in the entertainment business in Australia, New Zealand, Singapore, and Germany.

• EVT is pursuing the divestment of the 525 George Street development site, anticipated to unlock significant capital for reinvestment in growth initiatives, which may enhance future revenue and earnings.
  
• The fewer better cinema strategy is expected to continue driving improvements in average admission price and merchandising spend per head, potentially boosting revenue and net margins as film supply normalizes, particularly with a strong upcoming film lineup.
  
• EVT's Hotels division is showing robust growth, with initiatives such as the refurbishment and rebranding of key properties expected to increase occupancy and RevPAR, contributing positively to revenue and net margins.
  
• The potential for a special dividend following the sale of 525 George Street could directly impact shareholder returns and EPS, depending on the final decision regarding capital allocation.
  
• EVT’s strategy to leverage its strong property portfolio for hotel growth and enhance their asset maximization plan suggests future incremental revenue and earnings growth from the Hotels division, particularly as new hotel projects come online.

EVT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming EVT's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 6.7% in 3 years time.
• Analysts expect earnings to reach A$94.5 million (and earnings per share of A$0.58) by about April 2028, up from A$8.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$75.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, down from 240.3x today. This future PE is lower than the current PE for the AU Entertainment industry at 53.7x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.77%, as per the Simply Wall St company report.

EVT Future Earnings Per Share Growth

Risks

• The entertainment division faced reduced revenue due to fewer blockbuster film releases attributed to the 2023 Hollywood strikes, leading to a 14.9% decrease in EBITDA, which shows the division's sensitivity to disruptions in film supply impacting revenue and profitability.
  
• Thredbo's performance is heavily dependent on weather conditions, with poor winter weather reducing the season by four weeks and significantly impacting margins, resulting in a 10% drop in EBITDA, highlighting risks to revenue and profitability due to climate variability.
  
• The planned divestment of 525 George Street faces uncertainty as it is subject to market conditions and could affect capital recycling and potential special dividends, impacting overall financial flexibility and future earnings growth.
  
• The high fixed cost base in the entertainment sector exacerbates the impact of low admissions, as shown by a 70% decline in EBITDA when comparing Q1 results year-over-year, illustrating the risk to margins due to fixed financial obligations in response to volatile consumer patterns and film supply.
  
• EVT's financial health, while currently stable, could be pressured by additional upgrades and refurbishments in the hotels division, particularly at Rydges Queenstown, creating potential risks of increased costs and deferred EBITDA realization, impacting near-term earnings.

Valuation

• The analysts have a consensus price target of A$14.981 for EVT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$16.17, and the most bearish reporting a price target of just A$12.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.4 billion, earnings will come to A$94.5 million, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 9.8%.
• Given the current share price of A$13.08, the analyst price target of A$14.98 is 12.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.