Continuous Disclosure: Death of the cinema? The surprise in store for Fletcher shareholders and the shortest directorship

9 Oct, 2020: Vista's share price has been dragged down after the new James Bond movie was the latest blockbuster to have a delay on its cinema release.

Cinema effect

The delayed roll-out of movies like the latest James Bond is putting pressure on cinema chains and shares in cinema software firm Vista are also feeling the effects.

Stephen Bennie, Castle Point fund manager, said this week's decision to further delay the release of the 25th Bond movie, "No Time to Die", until next year, proved to be another mortal blow for cinema operators.

Cineworld, the world's second-largest cinema operator, this week responded by announcing it would be temporarily closing its doors and laying off 45,000 employees.

"This will also have ramifications for Vista Group International, provider of software to cinema operators, as it sees its customers continuing to unravel in the absence of new releases and dwindling numbers of moviegoers.

"If this continues for much longer the upcoming Bond movie will have to have the "No" removed from its title."

But Devon Fund Management's Tama Willis is more circumspect.

"Vista has a very dominant position globally in the cinema industry in terms of software having over 50 per cent market share.

"They have very strong level of net cash - at the half-year they had $75 million. They are very well capitalised."

Willis said he believed Vista could ride it through until the end of next year assuming the challenging conditions remain through next year.

They have already made some cost-cutting initiatives. And if the industry environment continues to be challenging there is potential for further cost out.

"That positions them against competitors in a very good place."

Willis said sentiment-wise Vista faced a short-term negative.

"But I think next year as economies recover, as we find ways of managing the virus, they will be in a much better position."

US market

The US cinema market could be the key. While China has nearly returned to pre-Covid levels, America, which is normally the larger market, remains closed in parts.

Warner Bros tested the market with the release of its Tenet blockbuster action movie but it generated global sales of only US$300m ($457m) with just US$40m coming from the US market.

Willis said that was in part due to the fact New York and some Californian cinemas were closed and they are a big part of US industry.

"They probably expected New York to open and it clearly hasn't. As a result of that - that probably didn't cover the cost of the film - a lot of the other films have been pushed out further into 2021. A whole handful of major blockbusters has been pushed out."

But Willis said that could see a busy year in 2021 for blockbuster releases as movies begin to stack up.

Death of the cinema?

He doesn't believe Covid will be the death of the cinema.

"Obviously you have seen some closures. And you may see some permanent closures but I also think you may see - there is potential for new owners to emerge of certain assets."

There is also yet to be proof that releasing blockbusters via video on demand will be the way forward.

Disney+ tried releasing Mulan direct to streaming. But Willis said it was unclear how that had gone with no official dollar figures released.

"There has been a range of conjecture from very good to actually it wasn't that good. You are not seeing a lot of blockbusters released to SVOD [subscription video on demand] right now.

"They are being delayed, which suggests the cinema route, if we get back to a more normal environment, is still the way they would expect to generate income off these high development-cost films although it is possible as the industry evolves it will be a combination of cinema and SVOD release with a shorter theatrical window but Vista can still thrive in an evolving industry given its technology focus.

"I think at the moment it is just a question of when we return to a more normal environment, so that Hollywood studios feel comfortable releasing a film they have spent 200-300 million dollars on."

Tide turning

Fletcher Building has had a tough time recently, but Castle Point portfolio manager Richard Stubbs says things might be turning in its favour.

"It is having a stronger start to its new financial year than its previous guidance accounted for with better demand in both NZ and Australia and greater delivery potential of cost out."

Stubbs said government budgets looking to spend on infrastructure projects on both sides of the Tasman would also help.

"There is also a sign that key competitors are similarly looking to focus on core businesses and exit the weak ones. This is classic capital cycle behaviour and should result in better returns for the industry."

Devon's Willis said Fletcher Building had been in the dog house for a long time but there were some positive signs.

"When you look across the ditch Australian housing starts to be pretty buoyant on all the incentives in place. The Australian budget was pretty generous."

Willis said looking back to when Fletcher management last gave guidance from when they reduced their cost base by $300m they assumed residential consents in New Zealand were going to be down 30 per cent and Australian consents were down 15 per cent.

"New Zealand consents are not down they are flat to up, so that's quite a big difference between down 30 and up. And Australia is certainly not down 15 either.

"So there is a lot of discussion about thinking through what could be the positive earnings impact from those different factors. For the first time in a long time people are talking about the potential for earnings upside as we go through this year versus what is the next issue that emerges.

"They could be positioned for the first time in a long time to deliver some sort of positive earnings surprise."

Analysts Jarden upgraded the stock's target price this week from $3.81 to $4.15 although they retain a neutral view on the company.

In a note research analysts Grant Swanepoel and Grant Lowe said they were updating their financial year 2021 forecasts to take into account a far more positive start to the year than what was anticipated two months ago citing falling borrowing costs as a driver for boosted house building.

"FBU [Fletcher Building] will likely outperform in the near term as forecasts lift ahead of FBU's ASM [annual shareholder meeting] on 25 November when management gives FY21 earnings guidance."

But the pair still expect a sharp decline in the second half of the builder's financial year as Covid fall-out continues to bite.

Shortest directorship

A Freightways director has potentially broken the record for having the shortest tenure on a board.

Former Toll executive Malcolm Grimmond joined the board of the freighting firm on September 14 and will leave it on October 29 - just six weeks later.

Grimmond had been due to stand for director election at Freightways' annual meeting on October 29.

But in a statement this week the company said Grimmond had decided not to stand for election citing personal reasons.

Stephan Deschamps, Freightways company secretary and chief financial officer, said the board "acknowledged Mr Grimmond's decision and wished him the very best for the future".

Grimmond who was brought on board as an independent director, had been seen as a strong hire given his background in the transportation and logistics sector.

He spent over 22 years with Toll Holdings, where he rose as high as acting chief financial officer.

This article was first published on the NZ Herald by Tamsyn Parker, Money Editor, NZ Herald