Shares in Village Roadshow Ltd (ASX: VRL) slumped almost 10% on Thursday after management reported lacklustre 2016 full-year results. Despite reporting a 1.8% rise to earnings before interest, tax, depreciation and amortisation (EBITDA) and material items, Village's full-year net profit after tax (NPAT) attributable to shareholders was almost 60% lower due to one-off items.
The drop in Village's profitability comes in stark contrast to peer Ardent Leisure Group's (ASX: AAD) 32% surge in NPAT reported on Wednesday, compounding the market's perception of how poor Village's results were.
Nevertheless, upon deeper investigation of Village's full-year results, it appears the global entertainment and leisure conglomerate could provide a thrilling investment yet. Here's why.
The villain
Village's headline NPAT result was dragged down due to a $20 million loss in its film financing division and $7.6 million in restructuring charges. These one-off items accounted for a substantial chunk of the $36 million in write-downs, resulting in NPAT coming to $15.7 million for the full-year.
Stripping these one-off significant items out, underlying NPAT was actually 1.5% higher on prior year at $50.9 million.
Nonetheless, the market expects more from a company trading on an underlying price-earnings ratio of 17x (before Thursday's drop), explaining Thursday's share price crash.
The hero
Pleasingly, however, the heroes of Village's results were its two largest divisions; theme parks and cinema exhibition.
Cinema exhibition delivered record earnings on the back of a string of blockbuster movies, leading to the division contributing 17% growth to underlying profit before tax.
Similarly, theme parks performed solidly during the year, notching up $88 million in earnings (EBITDA) despite poor weather reducing attendance by 100,000 visitors.
If these trends continue, Village should return to NPAT growth next year.
The plot twist
A key to future growth will be management's ability to successfully implement additional revenue streams and grow the existing business. Whilst the latter appears in good shape, the idea of entering new markets poses significant risks to shareholder value (think of what Woolworths Limited (ASX: WOW) did with Masters), meaning all of management's best laid plans could be ruined still.
With management already signing a deal to roll-out the TopGolf brand of leisure assets on the Gold Coast, and preliminary plans to open new theme parks in China, investors should watch developments keenly to determine the viability of these new initiatives.
The happy ending?
As the adage goes, never judge a book by its cover; Village's headline results show the global giant has some catching up to do in order to replicate the stellar growth experienced by peer Ardent.
Nevertheless, management appears to be taking the right steps to rebase earnings and chase new revenue opportunities, even though it is too early to know how successful these ventures will be.
In the meantime, patient investors will be rewarded a 14 cent fully-franked dividend for the half, placing it on a robust trailing yield of 5.8% (before franking credits). With the potential for Village to pay additional special dividends of up to 10 cents during the year (subject to franking credits), I believe the opportunity outweighs the risks at current prices.
Accordingly, it remains a buy in my books.
