Kathmandu Holdings Ltd

Improved first quarter EBIT:Kathmandu Holdings Ltd (ASX: KMD) reported for 40% less clearance stock inventory at the end of FY17 that led to an improved gross margin of 240 basis points (2.4%) above last year, lower inventory handling costs, strong working capital position and improved first quarter FY18 EBIT. Moreover, in the first quarter of FY18, the sales grew 0.6% at constant exchange rates (+3.6% at actual exchange rates), with 1.6% fall in the group same store sales (GSS) at constant exchange rates. Primarily, GSS was impacted despite a sales growth of +2.9% in Australia, as New Zealand GSS declined by 10.3%. The low clearance stock was a significant driver of the lower sales growth, especially in New Zealand. Additionally, the first half FY18 profit is expected to be above last year and is highly dependent on the success of the Christmas and January promotions. Given the potential an on-going momentum, we put a “Buy” recommendation on the stock at the current price of $2.25
 

FY17 Sales Mix (Source: Company Reports)
 

Donaco International Ltd

Low earnings at Star Vegas: Donaco International Ltd.’s (ASX: DNA) stock got beaten down with an 8.6% plunge on November 24, 2017. The group had otherwise signed a new debt facility with Mega Bank in August 2017, and had reduced the net debt to equity ratio from 15.4% in FY16 to 8.7% at the end of FY17. Moreover, DNA has posted unaudited four-month revenue of A$30 million. At Star Vegas, the company has paid some one-off expenses in the months of September and October, and recorded low earnings. Thus, EBITDA was reported to be $14.1m for the year to date. At Aristo, the low VIP win rate resulted in EBITDA of $3.6m for the year to date. The corporate costs were 5% down to $4m, from last year. As a result, the group EBITDA for the year to date is $13.7m. On a normalised basis (adjusting for win rates), EBITDA would have been A$5.6 million higher. The company has announced a new policy of paying out dividends at 10-30% of net profit after tax, and has paid a dividend of half a cent per share in October this year. DNA has also announced the implementation of an on-market share buyback program, which commenced in October. We give a “Hold” recommendation on the stock at the current price of $0.37
 

Village Roadshow Ltd

Soft trading update: Village Roadshow Ltd (ASX: VRL) stock fell 1.9% on November 24, 2017 after the company provided the update on its business. FY18 trading to date for the Cinema Exhibition division is significantly below the prior corresponding period, reflecting an industry wide depressed box office performance. The division was expected to have a weaker start to FY18 with some titles underperforming the expectations. The Film Distribution division, which is traditionally a hit driven business, also disappointed in FY17 as a number of titles underperformed. Based on title performance to date, the Film Distribution division’s FY18 EBITDA result is expected to underperform FY17. Meanwhile, the company has committed to reduce gearing significantly; and in October 2017, VRL completed the sale of Golden Village Singapore and aimed to use the proceeds of approximately $164 million to reduce its debt levels. In addition, VRL is currently undertaking a process for the sale and long-term leaseback of freehold land at the Oxenford, Queensland site. The company is in exclusive negotiations with a preferred bidder, and expects to see the process complete by late 2017 or early 2018. Given the expected improvement in debt levels and earnings, VRL Board expects to recommend a return to dividends before the end of FY18. Looking at the present weakness, we give a “Hold” recommendation on the stock at the current price of $3.66

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