Cityneon Holdings - CGS-CIMB 2018-05-14: 1Q18 Transformation Underway

Cityneon Holdings - CGS-CIMB 2018-05-14: 1q18 Transformation Underway CITYNEON HOLDINGS LIMITED SGX: 5HJ

Cityneon Holdings - 1q18 Transformation Underway

  • Cityneon's 1Q18 net profit is deemed in line with our/consensus full-year numbers as we forecast higher royalty income and more contract wins in coming quarters.
  • IP segment (revenue +97% y-o-y) was the key driver, while traditional business was flat in this seasonally-weak quarter and should see stronger momentum ahead.
  • We see potential risks from higher receivables, rising net gearing and shift in strategy.
  • Downgrade from Add to HOLD on emerging concerns and lack of catalysts, with a lower Target Price of S$1.16, now pegged to 11x FY19F P/E (prev.14x).

1Q18 net profit +80.4% y-o-y

  • Cityneon reported 1Q18 net profit of S$4.0m, which formed 17%/15% of our/consensus full- year forecasts. 
  • We deem this set of results within expectations, as we expect stronger contribution in coming quarters from higher royalty income and more contract wins for the intellectual property (IP) segment. 
  • 1Q18 topline grew 38% y-o-y on the back of stronger rowth in IP business, which now accounts for 62% of overall revenue (1Q17: 44%). Traditional business (events, exhibitions etc.) was flat in the seasonally weaker quarter.

Accounting standard changes minimise earnings volatility

  • With the recent change in accounting policy, revenue recognition for licensing fees and minimum guarantee of Cityneon’s travelling sets will be more milestone-based, unlike the lumpy contributions seen in previous years. 
  • We estimate half of such earnings to be recognised prior to and over the agreement period going forward respectively, which could improve earnings predictability and receivables’ turnover days.

Travelling pipeline underpinned by 4 IPs and multiple cities

  • Cityneon currently has 7 exhibits, and plans to have at least 9-10 permanent and travelling sets by end-2018. Among the 4 licensing rights, management seems most optimistic on Jurassic World (JW), which has recorded strong visitorship since its Apr-18 opening, with multiple cities vying for the set showcase upon the conclusion of Paris tour. 
  • We also understand there could be plans for the group to self-manage overseas operations, which we deem riskier vs. the current model of leveraging on local partners.

Opex also surged 45.8% y-o-y

  • We saw operating expenses in 1Q18 creep up by 45.8% y-o-y, largely due to higher depreciation expenses (from more sets and JW acquisition) and staff costs (+35.5% y-o-y). We think employee expenses could remain on an uptrend as Cityneon invests in expanding its management team and creative capabilities. 
  • Admin costs were also slightly higher as a result of freight charges incurred for moving the interactive set build to various venues.

Higher leverage and receivables are some concerns

  • The additional loans taken to build new sets led to higher net gearing for CITN, from 1.4x as at end Dec-17 to 1.5x. We expect net gearing to remain elevated in the near term with the company still in expansionary mode. 
  • 1Q18’s trade receivables were unchanged at S$62.8m (4Q17: S$63.2m), the majority (60-70%) of which stem from sizeable projects in the traditional business.

Downgrade from Add to Hold

  • We cut our FY18-20F EPS by 0.9-6.7% on higher depreciation and financing expenses, and reduce our Target Price to S$1.16, pegged to 11x FY19F P/E (previously industry average of 14x). 
  • Our 20% discount to peers and rating downgrade are based on emerging concerns from execution, receivables management and high leverage, along with lack of catalysts. 
  • Unexpected delays in roll-out of sets is a key downside risk, while stronger contract wins could re-rate the stock.

NGOH Yi Sin CGS-CIMB | 2018-05-14
SGX Stock Analyst Report HOLD Downgrade ADD 1.16 Down 1.580