In the last issue of Shares Investment, we looked at Genting Singapore and saw how expectations of heavy capital expenditure (capex) can mar investors’ sentiments for the stock. While the high rollers and thrill seekers find their excitement in Sentosa’s casino and rollercoasters, this issue we take a look at an alternative-styled theme park developer and operator based in Penang – Sim Leisure Group (Sim Leisure).
A relatively new entity to be listed in the Singapore Exchange, Sim Leisure debut on the Catalist board in March 2019 at $0.22 apiece, with an initial market capitalisation of $29.5 million. Currently, the stock is trading near its IPO price at $0.210, though it once fell to a low of $0.161 post-listing. Nonetheless, we think the stock still offers some unique and possibly rewarding value propositions.
Low Capex, Timeless Investments
With rampant modernization, people have become increasingly disconnected with the natural habitat, giving rise to a new breed of travellers that have the penchant for “off-the-beaten-track” experiences.
According to industry sources, demand growth for eco-tourism outpaces the tourism industry, with the global eco-tourism market growing at double-digits since early 1990s. The trend is expected to continue, reaching a compound annual growth rate (CAGR) of 11 percent during 2019 to 2025.
Hoping to ride on the growing demand of reconnecting with nature, Sim Leisure designed and built its “ESCAPE” adventure theme parks, with what it calls the “Low Tech, Hi Fun” philosophy. Unlike DisneyLand or Universal Studios and their highly technical setups, Sim Leisure’s ESCAPE theme parks simply feature jungle-swinging, monkey-climbing, and any other form of outdoor activities you can think of. Currently, ESCAPE comprises two districts, Adventureplay and Waterplay.
By embracing the rustic environment in its setup, features in ESCAPE theme parks are not extravagant. After all, how much can ropes, planks, nets and zip-lines cost? In addition, compared to conventional theme parks that need to refresh their rides and attractions constantly, ESCAPE features outdoor activities that are meant to be “timeless”. This further reinforces the management’s model of keeping both upstart and recurring capex limited.
On operating costs, the group is more likely to incur lower expenses than conventional theme park operators as well. Notwithstanding lower depreciation expenses, safety-compliance costs are also likely to be significantly lower.
Financial Performance And Outlook
Post-listing, Sim Leisure reported its first full-year results which proved to be promising. In FY18, the group posted revenue of RM21.2 million, representing an increase of about 120 percent. The improvement came on full-year contributions from ESCAPE Waterplay, higher number of visitors and hike in ticket pricing following the opening of the new extension.
Despite the hike in ticket prices, the higher visitor numbers indicate that consumers are still receptive of the new extension. Specifically, the group saw visitorship jump 65 percent from 112,000 to 185,000, of which 75 percent consists of locals. Correspondingly, the average revenue per visitor also saw significant increase from RM86.5 to RM115 during the period. This was further reflected in its higher gross margin of 59 percent compared to 48 percent a year ago.
Overall, the group generated a net profit of RM6.1 million in FY18, representing growth of 369.7 percent. The group also posted a rather impressive net margin of 28.5 percent, reflecting its cost-competitive business model.
Going forward, a third district Gravityplay is slated to be opened in 1H19, featuring chairlifts and two downhill karting tracks. Whilst the new extension will continue to support growth, investors should not expect to see the same impressive rates in FY19, given that another significant adjustment in ticket pricing would be unlikely in the short time span.
That said, the main catalyst in the making though is the expansion plans to construct a second ESCAPE theme park via a joint-venture with another local-listed company Imperium Crown. Under the Memorandum of Understanding agreement, Sim Leisure will design, build and operate the theme park in Wonder Stone Park, Linyi (China) for a period of 40 years.
Underscoring the potential upside for the planned Chinese theme park is none other than China’s huge consumer market and rising middle class. In particular, Linyi’s population of about 11 million people is more than 10 times the size of Penang.
We did a comparison of Sim Leisure’s valuation to some of the world’s listed pure-play theme park operators. Cedar Fair and Six Flags Entertainment are conventional theme park operators in the US and they are trading on a higher price-to-earnings per share (P/E) multiple of 18.4 times and 15.7 times respectively. Meanwhile, at 11.9 times P/E, Sim Leisure is also changing hands at a discount to Genting Singapore’s P/E of 14.9 times.
In terms of dividend yield, we can see that the US theme park operators offer highly attractive yields of between 6.4 to 7.6 percent. On the other hand, Genting Singapore only offers a dividend yield of 3.8 percent while Sim Leisure has yet to distribute any cash dividend.
That said, Sim Leisure has committed to distribute at least 30 percent of net profit in FY19 and FY20. Based on FY18 results and earnings per share of RM0.0564, a 30-percent payout ratio would already yield a decent 2.7 percent, based on an exchange on 3.0 RM/SGD.
With its much smaller scale and lower yield, it may seem reasonable for Sim Leisure to be trading at a discount to the much bigger players. However, a repeat success in China would spin a different narrative about the stock. At the current valuation, we think it is a cheap price to pay for, considering the potential upside.