Film projections key for IPO
DRIVING THROUGH Raetihi over the holidays, I was struck by the obvious decline of the little North Island town. Most of the storefronts appeared to be boarded up or closed, and not a soul could be seen.
That this was once a thriving centre could be seen in the facade of the Royal theatre on the main street, built a century ago, clearly in expectation of good crowds.
Unfortunately it seems the days of 250 people packing into the Royal for a Friday night at the movies are over.
It’s a reminder of the ups and downs of the cinema business – boom followed by the predations of economic change, TV, video and DVD.
But cinemas have adapted, and the movies are still with us, which is great for Auckland software company Vista Group.
Vista is among the current crop of companies to float on the NZX, and it has a good story to tell.
Its core business is providing software to help cinema groups manage their multiplexes, from customer ticketing to running projection and producing statistical reports.
The product began in a software contract for the old Kerridge Odeon chain in the early 1990s, and Vista is effectively the descendant of the original contractor, Madison Systems.
The company’s main software product is now used at 3000 sites in 60 countries, giving Vista a global market share of 37 per cent in the large cinema market.
In financial terms that translated to revenue of $30.5 million in the year to December and net profit of $5.7m.
After the initial public offer, revenue is forecast to be $45m this year and $61.5m in 2015. Net profit in those years is expected at $3.7m and $9.1m respectively, with this year’s result affected by float costs of $1.7m.
Some of that higher revenue and profit will come from businesses acquired with money from the IPO, but the basic numbers depict a healthy profitable business with growth prospects.
For a stake in those profits, investors are being asked to pay $2.35 a share, valuing Vista at about $188m.
That’s equivalent to about 35 times this year’s expected profit and about 20 times the expected profit in 2015, which means investors think Vista has a good chance of growing significantly.
One professional investor told me last week that he regarded the float price as not cheap, but ‘‘if it’s not cheap today it might look very cheap next year if it can sign up lots of cinemas.’’
Encouragingly, Vista’s track record of signing up new customers is good.
The company’s overall market share is already impressive, but within that Vista has carved dominant positions in some markets, based on share of the multiplex business.
In Australia and New Zealand, Vista is used at 84 per cent of big screens, while in Canada the figure is 89 per cent.
Measuring market share that way can be misleading – if there are only a handful of exhibitors in a market, then the switch of one exhibitor to a competitor could change the market share significantly – but it’s clear that Vista’s product has appeal.
However, the cinema industry in developed countries such as Canada and New Zealand is mature and low-growth. Vista needs growth opportunities to merit its valuation.
Fortunately, there are potentially big markets where the company can expand.
Vista’s prospectus includes figures on the difference between developed and undeveloped markets. For example, the number of cinema screens per million people in 2012 was about 60 in the UK, 87 in Australia and 127 in the US.
In China the number was 10, in Brazil 13, in Russia, 22.
From there the overall number of screens in key undeveloped markets was forecast to double by 2016 – and Vista’s business is particularly responsive to screen numbers.
There are competitors vying for their slice of this trade – the prospectus names NCR (Radiant) and Allure Global in the USA, Compeso, Admit One and ticket international in Europe, and Showbizz in India, among others – but it looks like Vista is in a good position to get a piece of the action.
Investors should obviously read the prospectus, which is one of the better examples from this year’s IPOs, but in general terms I’d see Vista as a New Zealand success story that should continue to grow, and will benefit from public listing.
Returns for investors will be strongly reliant on how well it achieves its growth targets. Although Vista has paid dividends in the past – it paid $4.4m to shareholders in 2013 – dividends are not planned for the financial years of 2014 or 2015, so the company should not be seen as an income generator.
And beyond the usual competitive issues, there is still the underlying risk of the wider cinema business.
Innovations such as digital distribution, 3D and computergenerated blockbusters have continued to entice audiences out of their homes, but this is an industry that has been hit hard by change in the past and could well be in future.
Raetihi is a reminder of the risk factor.