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2 tourism and leisure stocks worth considering

Glenn Freeman  |  04 Nov 2016Text size  Decrease  Increase  |  

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Contrasting with the tragic events at Ardent Leisure Group's Gold Coast theme park Dreamworld last week, some of Australia's tourism and leisure companies present bright opportunities for investors.


Australia's tourism and leisure sector holds good opportunities for investors, buoyed by the continuing influx of international visitors--particularly from China--amid a softening Australian currency and increasingly positive US economic figures.

More than 1 million Chinese tourists visited Australia in 2015, increasing 22 per cent on 2014 figures and doubling over five years, according to the Australian Bureau of Statistics.
Village Roadshow (ASX: VRL) operates a portfolio of market-leading businesses in the leisure and entertainment space.

While Morningstar doesn't award the company an economic moat, its cinema exhibition division holds particular interest, "because it commands about a 40 per cent share of the industry [and] enjoys a degree of moatiness with significant cost advantages over competitors," says Brian Han, senior equity analyst, Morningstar.

Village's cinema division has been a "shining light in recent years" with six-year EBIT CAGR of 11 per cent. "And we expect another 10 per cent lift in EBIT in fiscal 2017. The domestic box office has begun well, with weekend gross takings up 9 per cent year-on-year from July," Han says.

Without ignoring the considerable challenges cinema faces from technology-related developments, such as ever-cheaper home cinema packages, digital streaming services and alternative entertainment offerings, Han says Village is "investing sensibly to improve the social experience of 'moviegoing'". It is also participating in successful industry-wide efforts to combat piracy.

On the downside, other businesses within the group dilute the moat traits of its cinema division. Village is Australia's largest theme parks operator, with three signature properties on the tourism-centric Gold Coast: Warner Bros. Movie World, Sea World and Wet'n'Wild.

The intense competition for consumers' leisure dollars is a key reason for the group's lack of a moat rating. In addition, the profitability of theme parks is strongly linked to buoyant economic activity, consumer discretionary spending, weather and climate.

However, Han says there are "counterbalancing dynamics" that provide some earnings stability across the broader group. "During cyclical downturns, the cinema exhibition and film distribution businesses often benefit from more cautious consumers gravitating towards cheaper forms of 'social' entertainment," he says.

Event Hospitality and Entertainment (ASX: EVT), which operates a diverse portfolio of leisure assets, competes in the same space as Village through its Greater Union and Event Cinemas brands--which account for around 44 per cent of group earnings.

But it is also distinguished by its non-movie leisure businesses, including Rydges Hotels, Thredbo Ski Resort and a growing property arm.

Like Village, Event is not moated, and for similar reasons: fierce competition within the entertainment space, including the rapidly increasing availability of digital technologies; and reducing lead-times between film production and release to DVD.

Event's hotel and resorts division also faces challenges from the sharing economy, including network providers such as Airbnb.

In the context of theme parks, one can't ignore the tragic events that unfolded last week at Dreamworld, owned by Ardent Leisure Group (ASX: AAD), which has dominated news feeds across the country, even as police investigations and a Coronial inquest continue.

Ardent is currently trading at a discount of around 21 per cent to our unchanged $2.60 per share fair value, according to Han.

In fiscal 2016, Ardent's theme parks division accounted for 23 per cent of the group's total earnings before interest, tax, depreciation and amortisation (EBITDA).

"We estimate Dreamworld on the Gold Coast represented the bulk of the division's earnings, perhaps up to 70 per cent (or around 16 per cent of group total). The other properties in the theme parks division are Whitewater World and the Skypoint, both also on the Gold Coast," Han says.

He indicates further analysis on Ardent's investment case, and its outlook in the aftermath of the Dreamworld incident, will be made available to Morningstar subscribers in the coming days.

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Glenn Freeman is Morningstar's senior editor.

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