2 leisure stocks weather Cyclone Debbie, Dreamworld fallout

Glenn Freeman  |  02/05/2017Text size  Decrease  Increase  |  
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Glenn Freeman: I'm Glenn Freeman from Morningstar and I'm joined today by Brian Han, Morningstar Senior Equity Analyst, covering telco, media and leisure.

Brian thanks for joining us today.

Brian Han: Pleasure.

Freeman: Now Brian, first off: Ardent Leisure has been in the headlines again, this time with a change of CEO. Does this play into Morningstar's outlook for the company?

Han: The first thing to say is the change in management does not impact our stewardship rating which remains standard.

But I do believe that Mr Simon Kelly, the new CEO designate, has the credentials to lead the company forward. He has vast experience especially in areas of financial management and restructuring. And we will be particularly interested in his views on Ardent Leisure's expansion plans in the US with Main Event, which we've consistently considered to be too aggressive, especially in what is a very competitive family entertainment industry.

Freeman: Another leisure company Village Roadshow which operates three theme parks on the Gold Coast issued its second profit warning for the year earlier this week. What was this about and does this affect your outlook for the company.

Han: Village Roadshow's theme parks on the Gold Coast are still suffering collateral impact from the Dreamworld tragedy which happened late last year.

Now, Village does not own Dreamworld, but obviously patron sentiment towards these rides are still quite damn shaky at the moment and therefore Village Roadshow theme parks are getting impacted right now.

Also, as you know a month ago we had Cyclone Debbie sweeping through Queensland and that also pushed down attendances quite significantly. Now these one-off issues really don’t impact their long term based fair value estimate.

But what it does is actually has an impact on near-term dividends. Now Village Roadshow in the first half actually suspended their dividends because their debt load is too high. And I believe there were some investors in the market hoping that dividends maybe reinstated in the second half, but I think the reason trading up they basically dashed all hopes of that.

In our opinion Village Roadshow needs to sell some non-core assets to reduce debt, before it even thinks about paying dividends again.

Freeman: And Brian, tourism plays a big part in the success of these companies. How important are Australia's international visitor numbers?

Han: They are important in the sense that they do impact the theme park operations of these two companies. But the first thing to say is when it comes to these theme parks on the Gold Coast domestic visitors are still, they still make up the bulk of the attendances between 60 per cent to 80 per cent.

Having said that, theme parks are essentially fixed cost businesses. So, any increase in international visitors that can get through the gate has a very big favorable impact on earnings.

So, in that way international visitors and the continuing increase has a very good direct impact on earnings of these theme parks.

Freeman: And just lastly more broadly speaking what's your outlook for Australia's tourism and leisure sector over the medium term.

Han: I think people will always go out, spend money and enjoy themselves and in that way I think the leisure sector will always be there.

Having said that, it is a very cyclical, very volatile industry and as you know there are no shortage of options when it comes to leisure activities in the market. And this is the reason why we have no economic moat ratings on any of the leisure companies operating in this space.

Because whenever returns are high you can be sure that there will be competition coming in to compete away those high returns. And as the theme park tragedy last year shows you, it can be very volatile depending on one off instances like that and it can take time to recover.

So, in that way, yes, leisure sector will always be there, people will always spend money to enjoy themselves. But it is a very cyclical and volatile sector.

Freeman: Brian, thanks very much for your time today.

Han: Thanks Glenn.

Freeman: I'm Glenn Freeman from Morningstar. And thanks for watching.

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