Cityneon Holdings - CIMB Research 2017-08-16: 1H17 Waiting For Next Boost From Optimus Prime

Cityneon Holdings - CIMB Research 2017-08-16: 1H17: Waiting For Next Boost From Optimus Prime CITYNEON HOLDINGS LIMITED 5HJ.SI

Cityneon Holdings - 1H17: Waiting For Next Boost From Optimus Prime

  • Cityneon's 1H17 core EPS of 3.1Scts (+52% yoy, +125% hoh) met expectations, at 50% of our /Bloomberg consensus FY17F estimates.
  • In our view, minority shareholders should reject CITN’s mandatory general offer.
  • Potential key earnings drivers are growing pipeline of travelling sets and improving profitability of traditional segment. 
  • Maintain Add and target price of S$1.27.

1H17 core EPS growth of 52% yoy and 125% hoh deemed in line

  • While CITN’s 1H17 topline rose marginally by 7.3% yoy, core EPS was up 52% yoy, boosted by stronger gross margin of 47% (vs. 39% in 1H16) as a result of revenue mix changes. 
  • The intellectual property (IP) rights segment (particularly travelling sets) under Victory Hill Exhibitions (VHE) is a high margin business (1H17 gross margin of 86.7% vs. 87.4% in 1H16), accounting for 33% of 1H17 revenue (vs. 22% in 1H16).
  • In 1H17, the IP rights segment reported S$16.5m revenue and S$6.7m net profit, coming mainly from:
    1. royalty fees from the Singapore travelling set,
    2. licensing fees from Marvel Avengers’ Station exhibitions in Taipei, and
    3. Beijing. 
  • While we believe the permanent Las Vegas attraction may be underperforming our expectations, it remains profitable in 1H17, according to management.
  • Apart from existing exhibits and those already announced (Transformers in China, estimated Nov-17), we believe VHE has more travelling sets in the pipeline in FY17- 19F, which underpins our 3-year EPS CAGR estimate of 44.6% (FY17-19F).
  • The recent appointment of a new creative director, Mr Welby Altidor (previously from Cirque du Soleil) could spur conceptual development and rejuvenate existing sets.

Strong uptick in ex-VHE traditional earnings likely to continue

  • Despite 1H17 revenue declining by 8% yoy, there was marked improvement in CITN’s traditional business, as gross margin expanded 2% pts to 27% and 1H17 profit improved to S$3.2m (vs. S$1.9m in 1H16).
  • We attribute the 1H17 earnings uptick to the corporate rationalisation exercise undertaken in FY16 (estimated cost savings of S$1.3m) and the 46% yoy increase in interior architecture (IA) revenue. We expect this strong momentum to sustain in 2H17F (2H is seasonally stronger).

Offer price of S$0.90/share not attractive to minority shareholders

  • With the successful buyout of controlling shareholder, Star Media Group (STAR MK, Hold, TP: RM2.40) and a new board in place, we think CITN is better poised to pursue more aggressive expansion plans.
  • The mandatory general offer price of S$0.90/share is not only lower than our target price, but also represents a 5.3% discount to the closing share price of Cityneon. Minority shareholders should not take up this mandatory general cash offer, in our view, as we think share price could re-rate in 2H17F with strong earnings delivery and synergistic M&As.

Maintain Add

  • We make no changes to our FY17-19F EPS forecasts and target price of S$1.27, pegged to 15x FY18F P/E (at a 25% discount to peers’ average). Maintain Add.
  • Successful acquisition of the third IP could catalyse the stock, while we see downside risk from poor take-up of travelling sets.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-08-16
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.270 Same 1.270