Will Transformers, Jurassic Park be blockbusters for Cityneon?

A RECOVERING global economy, upcoming movie releases and growing interest from institutions and trade investors bode well for Cityneon Holdings as 2018 arrives.

But the real test for the exhibitions company will lie with its Transformers and Jurassic Park products, and whether Cityneon has placed its bets on the right franchises.

Cityneon's growth outlook is pegged to the company's intellectual property rights business, not just because that is the fastest growing part of its business, but also because the company's management has identified that segment as a key priority.

The company currently holds rights to produce interactive exhibitions based on three move franchises - Marvel Studios' The Avengers, Hasbro's Transformers, and Amblin's Jurassic Park.

Intellectual property rights revenue grew 60.8 per cent year-on-year to S$16.5 million in the six months ended June 30. It is not just a fast-growing business for the group, it is also one of the most lucrative, posting a gross profit margin of 86.7 per cent in the first six months of 2017. That was far above Cityneon's aggregate gross profit margin of just 46.8 per cent.

The stock is currently trading just over 10 times analysts' expected earnings per share of about 8.5 to 10.1 Singapore cents for 2018. That valuation is near the midpoint of price-earnings multiples for other listed peers, but that probably reflects declining sales at Cityneon's more traditional exhibitions-related businesses.

Positive signs

The good news for investors is that a number of positive signs lie ahead in 2018.

First, the global economy is expected to strengthen in 2018, with the World Bank projecting a 2.9 per cent worldwide expansion from 2.7 per cent in 2017. Crucially, in the United States, where Cityneon has permanent sets, the US Federal Reserve is now expecting 2.5 per cent growth in 2018, up from its September forecast of 2.1 per cent growth and on par with the expected growth in 2017.

The second external factor is that there is growing institutional and trade interest in Cityneon. In November, Cityneon announced that Hong Kong-listed Teamway International Group Holdings may have to make a chain offer for Cityneon if it takes a majority stake in Cityneon's majority shareholder, Lucrum 1 Investment. Given that Cityneon is Lucrum 1's main asset - Cityneon Ron Tan is among Lucrum 1's shareholders - there is little doubt that Cityneon is Teamway's target. No deal has been announced yet.

Most notably, a number of movies from the franchises on which Cityneon has based its exhibits are set to be released in 2018. There are three Marvel movies planned for next year, including the intensely marketed ensemble flick Avengers: Infinity War in May 2018.

From the Transformers, Bumblebee: The Movie is expected to launch in 2018. The sequel to 2015's Jurassic World, Jurassic World: Fallen Kingdom, has been tapped for a June release.

Those movies should keep interest in Cityneon's exhibits going for another year, at least.

Impact from Fox

The Avengers, Cityneon's oldest product in this segment, has been the key driver for the business so far, helping intellectual property rights revenue to most of its growth over the past two years. With Avengers movies consistently drawing positive reviews and earning strong box office numbers, that franchise appears to be the strongest asset in this part of Cityneon's business. If Disney's acquisition of Fox's movie assets - Disney owns Marvel Studios and Fox owns film rights to some of Marvel's comic characters - opens more doors and keeps the franchise going for even longer, Cityneon stands to benefit even more.

There is less certainty with regards to the Transformers and Jurassic Park franchises. Jurassic World was a hit in 2015, but the franchise has a weak history when it comes to sequels, and does not have the television tie-ins to keep up interest in the brand between films.

Transformers has the cross-media tie-ins, but its last movie was a critical and box office disappointment. Without strong films to drive up interest in peripheral products like Cityneon's interactive exhibitions, the company's growth prospects will take a hit.

Cityneon can ride on the coattails of The Avengers for only so long before it must find other brands to help propel its growth. While the company has made good decisions so far, it will eventually have to demonstrate that it can continue to pick winning franchises.