Cityneon Holdings (CITN SP) - UOB Kay Hian 2017-09-04: A New Chapter, A New IP And The Next Stage Of Growth

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CITYNEON HOLDINGS LIMITED 5HJ.SI

Cityneon Holdings (CITN SP) - A New Chapter, A New IP And The Next Stage Of Growth

• Cityneon has made a significant acquisition, adding the Jurassic Park intellectual property to its portfolio of esteemed names. This represents an acquisition of a fantastic business at a bargain multiple of only 5x earnings with a profit target. 
• The recent dip in Cityneon's share price post the news of the acquisition announcement opens an opportunity for investors to acquire shares at only a 10% premium to Lucrum 1’s cost of S$0.90. 
• Maintain BUY with a higher target price of S$1.50.

WHAT’S NEW

General offer completed. 

• Lucrum 1’s unconditional cash offer for Cityneon Holdings (Cityneon) has closed as of 29 Aug 17. Lucrum 1 now controls about 69% of the company.

Acquisition of Jurassic Park IP. 

• Cityneon has entered into sale and purchase agreement for the proposed acquisition of 100% of JP Exhibition LLC (JPE).

STOCK IMPACT

Jurassic Park acquisition at a bargain price. 

• JP Exhibition LLC (JPE) is incorporated in Utah, US, and is engaged in the development, financing and presentation of an exhibition based on the Jurassic Park motion picture franchise which features animatronic dinosaurs. JPE is held by six different parties with a net tangible asset value of S$7.7m as of 31 Dec 16. JPE generated a net profit of S$3.3m for the financial period from 1 April to 31 Dec 16.
• Cityneon will acquire JPE for US$25m payable in two tranches:
  1. upfront fee of US$20m upon completion of the purchase; and
  2. addition of US$5m subject to JPE achieving audited net profit of US$5m for the 12-month period ending 7 Jan 18. 
• Should the profit target be met, it would imply that Cityneon would be acquiring the rights to the Jurassic Park intellectual property (IP) at a bargain of 5x forward earnings. 
• Given Cityneon’s trailing 2016 and 2017 valuation of 36.9x and 14.7x respectively, this would make the deal EPS-accretive to Cityneon. 
• We are very favourable towards the acquisition as it boosts Cityneon’s stable of IP rights to three, in line with management’s strategy to acquire IP rights backed by movies with gross takings in excess of US$1b with sequels to support in the future. According to Box Office Mojo, Jurassic World is the fourth-highest grossing box office worldwide and has a sequel Jurassic World (Fallen Kingdom) slated for release in mid-18. 
• The acquisition has been approved and supported by Jurassic Park IP owner Universal Studios.

Jurassic World: The Exhibition already a success on its own. 

• Cityneon is buying into a ready-built and proven exhibition called Jurassic World: The Exhibition (JWTE). 
• JWTE made a 6-month stop in the Melbourne Museum in 2016, attracting over 430,000 visitors at an average ticket price of US$25. It was the most popular attraction at the museum since 2011’s Tutankhamun show, according to local Australian newspapers. The exhibition then moved on to Philadelphia’s Franklin Institute, attracting more than 400,000 visitors at an average ticket price of US$35. The set is currently at the Field Museum in Chicago and will be there until 2018. 
• JWTE comes with a pipeline of two future destinations, implying that the orderbook for JWTE is filled at least until 2019. Cityneon will adopt the low-execution travelling set business model for JWTE and continue to source for partners in new locations while collecting licence fees and variable royalties.

Old business could surprise on the upside post restructuring. 

• We understand that earlier this year, the traditional business has undergone a restructuring exercise to streamline operations in response to opportunities in the traditional business space in late-17 and 2018. 
• Management is optimistic on the opportunities available to Cityneon in the traditional business as the company spreads its wings in North Asia with possible opportunities for projects such as the Hong Kong Disneyland expansion, Shanghai Legoland, and also with Singapore Wildlife Reserves.

Setting the bar higher for Avengers S.T.A.T.I.O.N (AVST). 

• Management has previously set a target of 200,000 visitors per year for AVST in Las Vegas. With the JWTE exhibition attracting more than 800,000 tourists over approximately a one-year period in Melbourne and Philadelphia, we believe there is room for further improvement in the AVST exhibition so as to mirror the success of JWTC. 
• We expect the hiring of Welby Altidor as Chief Creative Officer to spearhead the creative improvements to AVST so as to bring the exhibition to the next level and attract visitor numbers similar to JWTE.

Price reaction post JWTE acquisition unwarranted. 

• Post the news of the EPS-accretive JWTE acquisition on 30 Aug 17, we believe the 2% sell-off at Cityneon is unwarranted and the market has severely discounted the company’s growth prospects.
• Investors would be buying into the stock at only a 10% premium to the S$0.90 that CEO, Ron Tan paid for Star Media Group’s stake.

EARNINGS REVISION/RISK

• We raise our 2018-19 net profit estimates by 12.2% and 7.5% respectively as we account for the new JWTE exhibit. We forecast yearly visitorship of only 600,000 for JWTE. Should the exhibition continue to perform as it did historically (>800,000 visitors), we would see upside to our earnings and target price. 
• We also adjust our sales forecasts downward for the low-margin event management business as we expect a lower number of sporting events in Singapore for 2018 and 2019.

VALUATION/RECOMMENDATION

Maintain BUY with a higher target price of S$1.50. 

• We change our valuation methodology to PE (previously SOTP) as Cityneon enters the next stage of growth so as to capture the earnings potential of the stock as the cash-generative capabilities of the existing sets are used to fund additional capex for future growth. 
• We have removed our dividend forecast as the group focuses on expansion. The stock now trades at a bargain of 10.1x 2018F PE vs peers’ average of 15.4x FY18F PE, with a superior ROE.

SHARE PRICE CATALYST

• Additional IP rights. If Cityneon is able to secure additional IP rights for other franchises such as Star Wars, we see further upside to our valuation.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-04

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.50 Up 1.280