Covid-19 coronavirus: Analyst sees Vista Group making a blockbuster comeback

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Vista Group's management gave a notably cautious appraisal of the cinema landscape, and their own prospects, at the company's annual meeting on Thursday afternoon.

But one long-time watcher of the company went on the front-foot as the meeting wrapped up, telling the Herald that Vista's shares, which were at $1.14 in late trading, and down 72.5 per cent for the year, are now firmly in his "buy" zone.

"I recently upgraded Vista to an "overweight" recommendation with a $2.54 12-monthly target price," Craigs IP analyst Stephen Ridgewell said.

"The stock has lagged the recovery in the market over the last six weeks and is trading at around 2.3x EV/sales [enterprise value to sales], well below the 4.3x average over the past five years.

Vista

"We see significant recovery potential as the market gets comfortable with the recovery trajectory of the global cinema industry," Ridgewell said.

"We expect the global cinema industry will begin to re-open from July, when two new blockbusters are slated for release - Chris Nolan's Tenet and Disney's Mulan. This will be a key catalyst for Vista's business to recover."

Vista's software will be even more critical for cinemas to be able to operate with social distancing restrictions such as online ticket purchases, click-and-collect food and beverage purchases, seat plans that adhere to social distancing and capacity limit requirements, the Craigs IP analyst said.

"As such, we believe Vista will emerge from the downturn with an even more dominant position in its industry - it had 51 per cent market share of large circuits prior to Covid-19).

"For example, Vista just this week won a contract to supply software to 31 cinemas operated by Pathé in the Netherlands, which is also an encouraging sign that activity is improving in the global cinema industry more generally."

Ready for worst-case scenario

The AGM saw Vista chairman Kirk Senior reassure investors that after its recently-completed $65 million capital raise, the company was financially equipped to cope with its envisioned worst-case scenario, chairman Kirk Senior told investors watching the company's virtual AGM this afternoon.

That is, that most cinemas worldwide remain shut through to the end of this year, and only slowly begin to open during 2021.

Senior said that quick and decisive cost-cutting had also helped. Some 80 per cent of staff are now working reduced hours on reduced income, the dividend was axed in February and a plan to buy a further 14.5 per cent of its Chinese joint venture (which would have raised its stake to 63 per cent) had been put on an open-ended hold, among other measures.

Like most, the company is offering no guidance. Senior said it was impossible to predict if there would be a second wave of outbreaks, how soon many governments would allow back into theatres, and how patrons would respond to social distancing rules.

Streaming partnership

Notwithstanding those many provisos, chief executive Kimbal Riley said he was "cautiously optimistic."

"The green shoots are not widespread yet but they are there in places."

Some cinemas in Australasia and the US had reopened. In Texas, a Vista Cinema "Reopening Kit" was being piloted that included "dynamic social seating" and features to help multiplexes manage sensation, contactless payment and kerbside popcorn pickup among other features.

A new partnership with another Kiwi company, ScreenPlus developers Shift72, aims to create a customisable streaming platform to get new-release movies into homes at a time when most theatres are shuttered, and film festivals cancelled.

"We've been talking to the Shift72 team for a while. We think this can help cinemas navigate their way through the Covid-19 situation," Riley told the Herald. "We have relationships globally so we think it is a potentially interesting combination."

Vista and Shift72 have already signed up US and NZ customers for the new platform as film festivals go online-only for 2020.

But Riley said it was "still too early days" to predict the sort of revenue that could be generated by the project, and whether it would have a meaningful impact on Vista Group's fortunes.

The Auckland-based cinema management and marketing software maker has been one of the NZX-listed companies most bluntly exposed to Covid-19.

Its shares enjoyed a big run-up over 2019 as investors appreciated it had seen-off the Netflix threat - and Vista shares touched $6.10, giving it a market cap of $1.01 billion.

That market cap involved some robust multiples, but with worldwide box office receipts continued to grow as young people sought the social experience of the cinema, they didn't concern most analysts.

Then of course came the coronavirus, first clearing theatres in Vista's key growth market, China, then its largest revenue generator - the US.

Vista shares troughed at $1.19 on March 23, and have since recovered a modest amount of ground (they were recently trading at $1.41).

At the company's AGM - virtual, in keeping with the times - the company's management sought to convince investors that its business can recover.

The company had already moved to shore up its balance sheet by drawing down $20 million from a facility with ASB during March, plus the aforementioned $65m raise via a discounted rights issue (priced at $1.05) that closed earlier this month, with founders and senior management taking $4.7m of the new shares.

Where there was still no guidance at the AGM, Riley said the first quarter of 2020 had been in line with Vista's forecast.

He said the impact of the pandemic on the rest of the year would be mitigated, to a degree, by recurring revenue from the company's cloud products, and the fact that Vista's management software was regarded as essential by many theatre operators, putting Vista near the top of the list for accounts-payable.

Still Riley added that the closure of cinemas has caused significant financial stress to cinema owners and that many customers are unable to pay their accounts on time, "or, in fact, be able to indicate when or if they might be able to pay."

That was then

A major project of Vista Group this year had been to move more of its products, and customers, on cloud or SaaS (software as a service) models, boosting recurring revenue in the process.

Riley said the SaaS project was still central to Vista's future, but the timetable was now up in their air. It would depend on talks with customers as they got a clearer idea of how the pandemic would play out.

Vista Group's financial year coincides with the calendar year.

On February 27, it reported that its annual net profit fell 1.5 per cent in 2018 to $12.8m on revenue that grew 11 per cent to $144.5m (SaaS revenue accounted for around a third of the total).

The numbers were in line with lowered guidance issued in August 2019 as major development projects were pushed back - indicating some speed wobbles even before the pandemic. The initial guidance was for revenue growth of up to 20 per cent for 2019.

The company's sales growth in the latest year is a slowdown from five consecutive years of 20 per cent-plus growth including the 23 per cent growth achieved in 2018.

Before it was pulled in the early days of the outbreak, Vista had been forecasting between 13 per cent to 18 per cent revenue growth in 2020, excluding China.