Rising Costs At Thredbo And Digital Shift Will Impair Margins

Key Takeaways

• Secular decline in cinema and persistent cost pressures threaten profitability, while high capital needs and asset maintenance may strain cash flow and dividends.
  
• Growth relies on hotel development and property sales, but non-earning assets and execution risks could hinder earnings and returns amid intense digital competition.
  
• Premiumization, asset optimization, and strong hotel performance are driving operational efficiency and sustainable growth, with EVT well-positioned for evolving consumer demand in leisure and hospitality.

Catalysts

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

• EVT's core Entertainment division remains structurally challenged by accelerated digital adoption and consumer migration to streaming, resulting in 8.3% admissions decline and a 3.7% decrease in revenue despite yield gains, which suggests ongoing secular pressures may increasingly erode top-line growth and compress cinema margins even as premiumization strategies are pursued.
  
• The company faces persistent upward pressure on operating costs including labor, insurance, and compliance, with continued reference to adverse weather, fixed cost inflexibility, and higher snowmaking expenses at Thredbo; over time this is likely to weigh on margins across all divisions and limit the effectiveness of cost control measures.
  
• Heavy capital requirements for asset upgrades and technology, illustrated by continued investment needs in hotel conversions, refurbishments and seismic upgrades (with $140–160 million targeted), will likely strain free cash flow and could impact dividend sustainability, especially as substantial maintenance CapEx is required on an aging asset base.
  
• EVT's long-term growth remains heavily dependent on major hotel developments and real estate recycling, but a significant portion (up to 30%) of its property portfolio is currently non-earning and the realization of value from major sites like 525 George Street is subject to execution risk and market conditions, potentially constraining earnings growth and return on equity if asset sales underperform.
  
• Intensifying competition from global streaming platforms and new digital entertainment offerings continues to threaten physical venue utilization, while EVT's relatively concentrated geographic exposure in Australia and New Zealand leaves revenues vulnerable to local economic downturns, regulatory shifts, and weather-related disruptions.

EVT Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on EVT compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming EVT's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.7% today to 6.6% in 3 years time.
• The bearish analysts expect earnings to reach A$92.6 million (and earnings per share of A$0.56) by about July 2028, up from A$8.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.9x on those 2028 earnings, down from 302.6x today. This future PE is lower than the current PE for the AU Entertainment industry at 159.6x.
• 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 9.86%, as per the Simply Wall St company report.

EVT Future Earnings Per Share Growth

Risks

• EVT's successful execution of its fewer, better cinemas and premiumization strategies is driving record results in average admission price and spend per head, demonstrated by delivering 5% higher Australian EBITDA in December despite 30% fewer admissions, suggesting operating leverage and pricing power could meaningfully support EBITDA growth if blockbuster film supply normalizes.
  
• The Hotels division continues to demonstrate strong, consistent growth with record occupancy approaching pre-COVID levels, rising RevPAR across all brands, and further expansion both through new managed hotels and upgrades, all of which could drive continued revenue and margin improvements across the portfolio over the long term.
  
• EVT's large and growing property portfolio, with a current value of $2.3 billion (up 15% since 2019), offers significant latent potential-strategic divestment of non-core or underperforming assets (such as 525 George Street) and reinvestment into higher-return projects may unlock further value, enhance capital returns, and increase sustainable earnings per share.
  
• Business transformation and cost optimization initiatives are delivering lower unallocated expenses and driving operational efficiency, evidenced by improved hotel margins and the ability to offset inflationary pressures, which bodes well for long-term net margins and sustainable EBITDA growth.
  
• Secular trends such as urbanization, digital fatigue, premium consumer demand for in-person experiences, and EVT's diversified platform (cinemas, hotels, resorts) position the company to benefit from resilient or rising demand for leisure and hospitality, supporting revenue and profit sustainability even as industry times change.

Valuation

• The assumed bearish price target for EVT is A$12.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of EVT's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$19.0, and the most bearish reporting a price target of just A$12.8.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.4 billion, earnings will come to A$92.6 million, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 9.9%.
• Given the current share price of A$16.47, the bearish analyst price target of A$12.8 is 28.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.