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Broker's take: CGS-CIMB downgrades Cityneon to 'hold'

BROKER CGS-CIMB has downgraded its rating on events and exhibitions firm Cityneon Holdings from "add" to "hold", reducing its target price to S$1.16 from S$1.58 previously. 

As at 10.16am on Tuesday, the counter was trading down 2.8 per cent, or three Singapore cents to S$1.03 apiece.  

Cityneon on Friday posted an 80.4 per cent increase in first-quarter net profit to S$4 million. This formed 17 per cent of CGS-CIMB's full-year forecasts, and is deemed to be in line with the broker's expectations as it foresees higher royalty income and more contract wins in the coming quarters for the group's intellectual property (IP) segment.

For the three months ended March 31, Cityneon's revenue grew 38.4 per cent on the back of stronger growth in its IP business, which now accounts for 62 per cent of the group's revenue. Traditional business including events and exhibitions, was flat in the seasonally weaker quarter, CGS-CIMB said. 

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Cityneon has seven exhibits, and plans to have at least nine to 10 permanent and travelling sets by the end of this year. Among the four licensing rights, management seems most optimistic on Jurassic World, which has recorded strong visitorship since its opening in April, with multiple cities vying for the set showcase upon conclusion of the Paris tour, CGS-CIMB said. 

"We also understand there could be plans for the group to self-manage overseas operations, which we deem riskier versus the current model of leveraging on local partners."

CGS-CIMB analyst Ngoh Yi Sin also noted that the group's operating expenses crept up by 45.8 per cent from the previous year, largely due to higher depreciation expenses from more sets and the JW acquisition, as well as higher staff costs which recorded a 35.5 per cent increase year-on-year.

Furthermore, the group's higher leverage and receivables could pose potential risks, the broker said. 

"The additional loans taken to build new sets led to higher net gearing for Cityneon, from 1.4x as at end December 2017 to 1.5x. We expect net gearing to remain elevated in the near term with the company still in expansionary mode."

Taken together, the broker is downgrading its rating on the stock on the back of higher depreciation and financing expenses, along with the lack of catalysts. 

"Unexpected delays in roll-out of sets is a key downside risk, while stronger contract wins could re-rate the stock," CGS-CIMB said.