The Australian Government has recently announced a $250 million relief package, particularly for the revival of the creative economy by bringing the entertainment, arts and screen sectors back in the game. Amid the current phase of re-opening, businesses across Australia are taking diligent measures to operate smoothly, while taking care of the health & safety of the staff. Different sectors have faced different types of challenges, based on the nature of products or services provided. Recommencement of operations has been one of those challenges, which were dependent on the government’s directives and the cost of operations during the current economic environment. The arts and entertainment industry has probably been one of the sectors that suffered a prolonged period of shutdown.

The commercial arts and entertainment sector felt severe pain during the COVID-19 crisis and requires the government’s attention in the recovery phase. The government also notified that the $112 billion arts sector employs over 6 lakh Australians and will be supported by a range of new grant and loan programs over the next 12 months. The plan/package follows the previously announced measures for providing $100 million per month financial assistance to the arts sector, through the JobKeeper and cashflow supports over April and May.

Support Package Details: Out of the total amount to $250 million, the government has set aside $75 million in competitive grant funding in 2020-21 through the Restart Investment to Sustain and Expand (RISE) Fund.The amount will be used in helping production and event businesses to organise new festivals, concerts, tours and events, on further easing of social distancing restrictions. Under this category, grant sizes will vary in the range of $75,000 - $2 million. The second component of the package is a $90 million grant, to be delivered through commercial banks, backed by a 100% Commonwealth guarantee. Grants provided under this category will be in the form of concessional loans to assist creative economy businesses to fund new productions and events that stimulate job creation and economic activity. The third component has been sized at $50 million in the form of a Temporary Interruption Fund for kick-starting local screen production. This category will support local film and television producers to secure finance to restart filming. The fourth and last component comprises $35 million for providing direct financial assistance to support significant Commonwealth-funded arts and culture organisations facing threats to their viability due to COVID-19. These may include organisations operating in theatre, dance, circus, music and other fields. Under this funding, the Government will partner with the Australia Council to deliver the grants.

Apart from the financial assistance, the government is keeping a careful check on the safety of the public and workers in the arts and entertainment sector. The Australian Government developed COVID-19 safe working guidelines to support the reopening of National Collecting Institutions and the screen sector and is now in the process of developing broader guidelines with the Australia Council. In addition, the Prime Minister is also eyeing the National Cabinet’s approval in relation to certainty about the timetable required by the entertainment industry to re-activate their business and help them devise a concrete plan for the recovery phase.

The arts industry was one of the first to collapse amid the COVID-19 related tensions and containment measures. While players in the sector will take considerable time to attain complete recovery, the recently announced package is likely to provide some sort of relief to the ailing businesses. The rescue package will help remobilise production and will ease barriers for the sector to allow smooth operations. Such relaxations will enable these businesses to formulate specific plans for revival, speed up the efforts to cover any losses and promote employment.

Recommencement of operations in the arts and entertainment sector, new productions, organisation of events, etc., coupled with the easing of social distancing restrictions, will result in a rise in demand for recreational activities. This will further support recovery in the sector through the injection of revenues, accelerating the healing progress. The timing of this rebound is, however, subject to current economic conditions, especially in relation to COVID-19, which has sent another shockwave across several states in Australia. In light of the relief package, let us have a look at few stocks, which are making continuous efforts to minimise the damage from COVID-19 and have issued a decent outlook for the future.

1. Tabcorp Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 6.73 Billion, Annual Dividend Yield: 11.18%)
Tabcorp-Tatts Amalgamation to Deliver Synergistic Benefits:Tabcorp Holdings Limited (ASX: TAH) is involved in the provision of gambling and other entertainment services. In 1HFY20 for the period ended 31 December 2019, the company’s revenues increased 4.4% year over year and came in at $2,913.9 million, achieved in combination with significant integration activity. During the period, the company added another 300,000 active registered customers. EBITDA for the period increased by 2.1% year over year and came in at $596.5 million. NPAT for the period stood at $213.5 million, up 2.9% year over year.
 
Outlook: The company aims to review Gaming Services and plans to implement necessary steps for a business optimisation program in 2HFY20. The Tabcorp-Tatts amalgamation is likely to deliver $130 million - $145 million of EBITDA synergies and business improvements in FY21. The management is confident that the company owns a strong and resilient business, with a portfolio of high-quality assets and earnings, which is diversified throughout the businesses of Lotteries and Keno, Wagering and Media, and Gaming Services. The company has also reached an agreement with its US Private Placement note holders for a waiver of interest cover covenants and adjustments to leverage covenant ratios in connection with the next two testing dates being 30 June 2020 and 31 December 2020.

The company’s Gaming Services business posted revenues of $149.0 million, while its EBITDA amounted to $65.9 million in 1HFY20. The Gaming Services have been creating a solid and sustainable base to pursue geographic as well as adjacent growth opportunities.With Tabcorp-Tatts combination, the company has created a robust and diversified portfolio of high-quality businesses throughout Lotteries & Keno, Wagering & Media and Gaming Services. The company has a clear set of priorities to build on competitive advantages and drive long-term profitable growth, as restrictions ease and people shift to outdoor means of entertainment. In a recent announcement, the company updated that Jumbo Interactive Limited has extended its 15-year relationship with TAH through a binding agreement for an extended term of 10 years to 2030. The agreements support Tabcorp Holding’s long-term relationship with a valued reseller and distribution partner like Jumbo Interactive Limited.
 
Key Risks: The company is exposed to certain risks associated with managing the increased complexity to ensure the successful migration of UBET customers to the TAB platform. Further, the company has compliance and accountability framework risks to manage its business in an effective manner. Also, changes in law and regulatory government policies, as a result of changes in nature of operations, increased costs, and resourcing demand are potential headwinds. Stiff competition adds to the risk profile.


 
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
 

EV/EBITDA multiple based relative valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 

A-VIX vs TAH (Source: Refinitiv, Thomson Reuters)
 
Stock Recommendation: In the last six months, the stock has corrected by 29.12% on ASX and is currently trading slightly below the average of its 52-week trading range of $2.090 - $4.980. The company remains on track to invest in improving product innovation and building digital capabilities. After the market fallout, the stock has demonstrated favourable movements in response to the market volatility index, as depicted in the above chart. The strength of the business lies in its diversified portfolio of services and competitive advantage, that will support operations in the post-COVID period and will drive long-term growth. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $3.34, up 0.906% on 29^th June 2020.

2. Nine Entertainment Co. Holdings Limited (Recommendation: Buy, Potential Upside: Low Double- Digit)
(M-cap: A$ 2.31 Billion, Annual Dividend Yield: 6.27%)
P&L Benefits Anticipated from Revised Contract with NRL: Nine Entertainment Co. Holding Limited (ASX: NEC) is one of Australia’s leading locally owned media company. It is primarily engaged in broadcasting and program production across Free to Air television along with metropolitan radio networks in Australia. In 1HFY20, the company reported revenue of $1,182.5 million with EBITDA of ~$250.8 million, and a net profit after tax of ~$114.3 million on a statutory basis. The company declared an interim dividend of 5.0 cents, fully franked.
 
Outlook: As a result of the rapid progression of COVID-19 uncertainty, the company has withdrawn its guidance for FY20. Looking ahead, the company is focused on bringing forward cost efficiencies where possible. In the recent Macquarie Australia Conference, with respect to Broadcasting, NEC had stated that this business aims to hold profitability through the cycle with the help of share gains as well as by focusing on cost. The Domain business is focused on building Australia’s leading digital destination with respect to the property via listings, editorial as well as associated consumer solutions. In the Macquarie Australia Conference, it was also mentioned that the overall positive momentum is anticipated to continue. Recently, the company stated that it has revised contract with the NRL for season 2020, 2021 and 2022. As per the revised contract, NEC anticipates P&L benefits, as a result of alterations in rights fee and related production and services arrangements of ~$27.5 million each year in FY21 and FY22. In FY20, the company stands to benefit from the given modified season and expects cash costs to be $225 million, down from $289 million.
 
The Audiences across all the company’s platforms are showing strong growth, including linear audience growth on core News and Current Affairs content. In order to tackle the current global crisis, the company intends to implement major short and long-term cost initiatives across all of its businesses. In late February, the company notified that almost 40% of the company’s earnings were being sourced from growing digital platforms and it is targeting mass audiences through its data and technological capabilities, which will provide immense support in the recovery phase. In 3QFY20, revenues from FTA market declined 9.5%, whereas NEC’s share stood at 43.9%, which was up 3.1 pts. During the quarter, total revenue from broadcasting went down 0.6%. In April, NEC’s FTA revenue went down 29.8% year over year. Coming to Digital, subscription revenue (which included bundle) grew 13% to date on pcp. Digital advertising was positively impacted by google deal. The company witnessed robust growth in active subscribers and per subscriber usage for Stan. Notably, the company expects EBITDA for Stan in 2HFY20 to be more than 1HFY20. In third-quarter, Domain’s digital revenues increased by 3%, whereas total revenue increased by 1% (after including adjustments for divestments).

Key Risks: From a business perspective, the company is exposed to numerous risks such as transmission failure, system failure, inaccurate reporting, and data loss. Further, the company is subject to changes in regulations imposed by local or state governments. Also, the company is exposed to the integration risks of Fairfax acquisition. Stiff competition from peers along with system security and data privacy risks are few other potential headwinds.


Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
 

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 

A-VIX vs NEC (Source: Refinitiv, Thomson Reuters)
 
Stock Recommendation: In the last six months, the stock has corrected by 26.36% on ASX and is currently trading below the average of its 52-week trading range of $0.815 - $2.090. After a sharp fall during March, the stock recovered rapidly as soon as the market began to stabilise. The recent trading update by the company has been favourable, with the digital business experiencing an increase in subscription revenue. This aligns with the company’s aim to expand its digital presence and extend its services to larger audiences and will be a growth catalyst, going forward. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $1.34, down 1.107% on 29^th June 2020.

3. Village Roadshow Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 419.79 Million, Annual Dividend Yield: 13.02%)
All Businesses to Reopen by July: Village Roadshow Limited (ASX: VRL) is primarily engaged in the operation of theme parks, water parks, film distribution, cinema exhibition, etc. During 1HFY20, the company reported EBITDA excluding the impact of AASB16 amounting to $59.1 million, as compared to $65 million in the prior corresponding half. The company maintained a strong balance sheet with leverage of 1.67x as on 31^st December 2019. The Theme Parks division was characterised by record ticket sales and ticket yield, along with improving volume.
 
Outlook: Theme parks were closed due to the coronavirus outbreak and the company expects a negative impact of ~$3 million in 2HFY20. In a recent announcement, the company updated that its COVID Safe plans for the Gold Coast theme parks have been approved by the Queensland Government, with reopening allowed at 50% capacity. Other businesses including Australian Outback Spectacular, Warner Bros. Movie World, Wet’n’Wild, etc., are set to reopen over the next 15-20 days. The company’s cinema circuit in Tasmania has reopened and the regional cinema circuit in Victoria will reopen this week. Other cinema circuits will reopen in July. The company is seeking to increase its debt financing to provide liquidity for retaining employees, ensure safety and maintenance and pursue important capital expenditure projects.
 
The company has a loyal and rewarding customer base in its Cinema Exhibition division, which will support the quick revival. In 1HFY20, the membership base grew ~31.5% on y-o-y basis, driven by enhanced guest satisfaction, with increased net promoter scores and positive guest feedback. In the Film Distribution segment, the company has a forward-looking strategy of more targeted and flexible film acquisitions and is aiming to maximise revenue across the entire product lifecycle from Theatrical to Home Entertainment and Television. To support the continued employment of all eligible employees, the company is participating in the Commonwealth Government’s JobKeeper arrangements. Underlying operating cash costs net of JobKeeper subsidy are expected to be between $10 - $15 million.
 
Key Risks: An indebted position, with gross debt of $342 million as at 30^th April 2020 and plans to secure further debt financing can be a risk for the business, going forward. A shift in consumer spending could impact the demand for the company’s services. Moreover, a continuously evolving technology in the entertainment space, with increased digitalisation and portability being key focuses for many consumers, may impact the business.


 
Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
 

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 

A-VIX vs VRL (Source: Refinitiv, Thomson Reuters)
 
Stock Recommendation: In the last six months, the stock has corrected by 43.72% on ASX and is currently trading slightly below the average of its 52-week trading range of $0.77 - $4.1. Despite the COVID-19 market tensions, the stock has been on stable grounds since mid-May. Although the business has been impacted by the delays in movie releases, the company’s sticky customer base in Cinema Exhibition division and a well-spun strategy for the Film Distribution segment are expected to drive long-term growth in the business. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.18, up 1.395% on 29^th June 2020.

4. EVENT Hospitality & Entertainment Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.37 Billion, Annual Dividend Yield: 6.0%)
Strong Film Line Up to Support Recovery: EVENT Hospitality & Entertainment Limited (ASX: EVT) owns cinema exhibition operations in Australia, New Zealand and Germany. The company is also engaged in operation and management of hotels and resorts. During the first half ended December 2019, the company’s Entertainment Group reported 6.1% growth in revenue and 7.4% growth in adjusted profit, driven by new initiatives. The Hospitality segment reported a rise of 4.4% in adjusted profit and the Leisure segment reported a decline of 2.8%. The company’s underlying costs were under control due to the business transformation initiatives in place.
 
Outlook: Due to COVID-19 challenges, the company did not provide guidance for its Hotels business. For the Entertainment segment, the company stated that film line-up for H2 2020 was up against a strong H2 2019. Bushifire conditions and temporary closure of Thredbo are estimated to have an impact of $1 million - $5 million on profit before interest and tax. The company has in place appropriate mitigation strategies and is well funded during these unprecedented times.
 
During the business shutdown phase, the company has taken significant action to reduce its operating cost base, including the offer of flexible work weeks, voluntary wage reductions by senior management and staff, ban on all discretionary expenditures, halt in non-essential projects, etc. Although the short-term negative impact was inevitable, the company is confident about the cinema business to recover quickly in the presence of a strong film line up, immediately after the COVID-19 impact has passed. Moreover, the Government’s initiatives to support the entertainment sector will further accelerate recovery.
 
Key Risks: Fair value of the Group’s Property portfolio may rise or fall due to factors such as earthquake risk or any other catastrophic incident which can result in damage or loss of future profits. Alternative film delivery methods, shortening of release window of films, increase competition, increase in piracy are some of the threats to the Entertainment revenue. Moreover, increased competition in the hotels market and growth and market penetration of alternative accommodation providers pose a risk to the hotel businesses.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
 

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 

A-VIX vs EVT (Source: Refinitiv, Thomson Reuters)
 
Stock Recommendation: In the last six months, the stock has corrected by 36.99% on ASX and is currently trading below the average of its 52-week trading range of $5.44 - $14.28. In the short term, the business has been impacted by COVID-19 containment measures. As a result, the stock price has also been under pressure in the past couple of months, as depicted in the chart above. The company has a large base of active loyalty members in the Entertainment segment which contributes to a major portion of its transactions and drives strong digital revenue growth. With a strong balance sheet and a loyal customer base, the company can boost its recovery and deliver long-term growth for its stakeholders. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $8.45, down 0.588% on 29^th June 2020.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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