Wonderla Holidays


(Yogesh Sane) #64

Thanks for your insights. Growth capex is good for investors as it generates additional revenues and profits. Actually, I actively search for companies that will be able to deploy all their operating cashflow as growth capex for next several years. In fact that’s how I got attracted to Wonderla. However, I am not yet convinced if all the capex Wonderla will incur in the future will be growth capex or maintenance capex? My hunch is it may have to incur high capex just to maintain current level of revenue in real terms because visitors will keep coming only if new rides are regularly added or upgraded. May be you can help me get convinced. Such companies sell at book value and not at a high multiple of cashflow.

When Adlabs Imagica started, Essel World had to spend large amount on capex and advertisement and I am sure all that was just to keep their revenue from falling. Wonderla at this stage does not have competition from other similar parks so they are the only game in town and can set prices without fear of falling revenues. But that situation may change. If the theme park business really takes off, other well capitalized players will jump in and cannibalize each other as I don’t see any customer loyalty in this business.

In short, this is a cyclical business that’s best to get in at the bottom of a down cycle (if the company is not heavily leveraged at that point) rather than at current valuation.


(rajput.delhi) #65

A comparison of ‘economic earnings’ across different periods might show that as a park matures (like Kochi, Bglr) these earnings increase disproportionately to mtx capex thereby leaving enough capital for growth capex. Would that be convincing?

Rgds
RR


(Kumar Saurabh) #66

Fore th two parks which have existed for more than 10 years, you can get a sense of maintenance capex. As far as i remember, on 7-8 years, a capex of around 30 crores was required to introduced 2-3 new rides to drive excitement. Apart from that I am not sure if any major big capex was spent.
Regarding competitive entry, i do not think this is so easy considering : 1. Difficulty to find big size land banks 2. If a new player enters after X years, the appreciation in land prices may change the profitability equation for new players 3. As far as i know, no other theme park company has in-house equipment manufacturing and maintenance advantage due to wonderla is much more profitable and hence if you see leverage of other parks it is much more higher 4. Even if competition comes, due to leverage and ability for wonderla to withstand adverse cycles by fight on price and being less leveraged, i see wonderla standing tall in the end. However, considering all these factors in the equation, i do not think, it makes sense for a new entrant to enter in cities where wonderla is already present but yes for cities where no one is present at such scale, there could be competition


(Value Seeker) #67

No holdings.

The capex in this business reminds me of Alice in Wonderland - “It takes all the running you can do, to keep in the same place

There needs to be new rides to create excitement for people to go again and again.

Best regards


(Yogesh Sane) #68

@Suru27 and @rajput_delhi thanks for your replay especially because bearish posts don’t generate much response here.

Here is some data I collected about theme park operators to form a base for further discussion.

Source: Capitaline

Source: Google Finance.

There are just my neutral observations. Since I never invested in Wonderla, I don’t have a bullish or a bearish bias.

  1. Depreciation as a % of sales for Wonderla is 7-9% in line with mature parks in US. Adlabs is high either because their asset base is high or their sales is low or they are using accelerated depreciation to save on taxes or all of the above.

  2. Asset Turnover (how much sales does the assets generate) for Wonderla is somewhat higher than mature parks in US indicating it is able to squeeze more juice out of lemon. Adlabs is asset heavy. It needs a sales boost to justify investment.

  3. Advertisement as % of Sales - Wonderla is able to generate good sales without spending too much on advertisement. Looks like they are getting a good word-of-mouth advertising.

  4. Average age in years - Wonderla has old assets compared to mature parks in US and much older than Adlabs. Unlike a natural person, average age of a going concern should remain same as old assets are depreciated and replaced with new assets.

  5. Avg Depreciable life in years - This is the life expectancy assumption used in asset accounting. Wonderla is assuming that its rides will keep generating revenue a little longer than others. This may be a little aggressive.

  6. Relative Age % - This is the part of the asset’s life that is used up. Wonderla’s assets are used up more than others to some extend.

  7. Growth vs Maintenance Capex - I am assuming that any increase in net block and capitl wip is growth capex and everything else is maintenance. For a mature park, maintenance capex should be equal to depreciation expense so net income equals free cash flow. Wonderla is close to that.

  8. Wonderla is almost doubling its net block with the upcoming park. financials for this new park may look that of Adlabs in terms of depreciation and advertisement so over the next 2-3 years, Wolderla may report lower profitability.

  9. Wonderla may also have to be bump up depreciation of its current parks as it appears to be under depreciating.

  10. Adlabs growth is impressive.

My concern is newer parks of Wonderla will not be as profitable as existing parks going by how Adlabs is performing. Market has already discounted that newer parks will be as profitable. My most optimistic DCF valuation for Wonderla is Rs 225.


(Bheeshma Sanghani) #69

my two cents -

Growth without an acceptable return on assets harms the shareholders over the long term.

Its a bit like sending a 5 year old to a class meant for 7 year olds hoping that he or she will intellectually grow quicker than 5 year olds. Your kid not only will flunk but will also have to live with an inferiority complex for the rest of his or her life. But a 7 year old in a class of 5 year olds will ace everything.

If a company has low returns and has a view that growth will improve returns then usually its proven wrong. It should first concentrate on fixing the returns before doing any growing.

have a look at the following chart of wonderla ( numbers are in crs except %'s )

While profits have compounded at 15%, Average ROA over the last 6 years has been 23%.

Wonderla is NOT a company that focuses on growth for the sake of growth , it clearly is focused on ROA before it embarks on any expansion plan. In other words, its a 7 year old on a class meant for 5 year olds


(Sunnytv) #70

Last quarter was impacted by Cauvery issue as visitors from TN could not come. This quarter is also looking quite dismal for a company trading at high valuations. With Death of Jayalalitha and demonetisation issue, the visitor numbers to Bangalore facility from TN will likely be affected.

I can’t see any positive triggers in the near term. It will be a attractive buy at a much lower price. Even if one is a ultra long term investor, there needs to be some sense of market mood and events that will impact a company in the near term.


(TT) #71

TN has been very peaceful despite recent (i.e. Jaya’s demise) events. What makes you think people will stop visiting amusement parks because one person died? Be realistic, it will cause some grief for a few days and everyone will move on.

There may be other reasons for lower numbers, by Jaya’s demise will not be one of them.


(Bheeshma Sanghani) #72

on sep 9 the high court banned conversions of wetlands into dry lands in Chennai which has put wonderlas chennai park on hold and is pending registration. No land no park. However, the ban only applies to unapproved parcels of land i.e where the land is actually wetland but it is shown as dry land by intentionally not doing any cultivation for years and then trying to pass it off as dry land. No ethical developer in his right mind especially one that is buying large tracts of land would get into a deal where wetlands are masquerading as dry-lands. Unless the agency contracted by wonderla to acquire land is brain dead. I am hoping that its not.

Secondly, the MOU has been signed with the Chennai government in its Sept 15 GIM meet and provides for an employment of 900 people.
http://tamilnadugim.com/TNGIM2015%20MoU%20Details%20%20Revised%20%2010092015.pdf
While a mere signing of MOU doesnt constitute a contract there are certain rights & obligations that need to be honored by the persons signing it and they often show the governments intent. So clearly, the Chennai govt wants Wonderla to open up its park there and will support any appeal.

Thirdly, legally if all due diligence has been done and stamp duty has been paid ( which it has ) and the only thing remaining is to register the document ( which seems to be the case ) then under law the registrar cannot refuse to register. But this is all theoretical at this point.

In sum, in my opinion the high court blanket order on conversion is likely not to apply to Wonderla. Even if it does then the government by virtue of the MOU will have some obligations to provide another parcel of land.

Regards - Bheeshma


(Ketan) #73

My musings and observations :

  1. For Wonderla, both Kochi and B’lore parks are almost depreciated assets, while it has to depreciate Hyd now. One way, this may help from P&L & cash flow point of view, on the other hand, it will lose depreciation cover for offsetting tax
  2. For Maintenance capex: As per my reading of AR and cash flow details within AR, capex was to the tune of 13-15 Crs till FY10 and then onwards 35 Crs till FY15. This would including capex for new rides / attraction company introduces regularly. Thus Rs.10 Crs maintenance capex per Park plus Rs.15-20 Crs every two years for new attraction may be a good idea?
  3. Wonderla has increased ticket price for every single year for Kochi and B’lore since year 2010, which is a good feat by any standard. The F&B and product revenue has also gone up steadily (unfortunately more details on this is available since only FY15) . Thus it can use cushion in ticket price to increase (stagnant) footfalls, while achieve higher F&B spend to help revenue as well
  4. Chennai or a new park will be very critical for the company to grow after Hyd becomes saturated in next 3-5 years
    Disc: Not yet invested, but under consideration…

(S Khan) #74

@Yogesh_s thanks for sharing this.

Could you please share your DCF in detail? Wanted
To understand underlying assumptions and numbers.


(Yogesh Sane) #75

I am pasting a link to the sheet that I sent to another member. Hope the link works.

http://forum.valuepickr.com/uploads/default/original/2X/b/bfd08e12a71d5633321dfc35dea6697592c47485.xls

This is my own method of using dividend discount model. You may or may not agree but it has worked for me.

Assumptions
I calculate future dividends based on equity base, return on equity and payout ratio.
Payout ratio goes up to reflect diminishing growth opportunities in future until it reaches a level where sustainable growth rate is slightly lower than nominal gdp growth rate.
Company may or may not pay a higher dividend but this is a conservative assumption. Company may choose to retain profits and reinvest. But the assumption here is company’s current business will reach a maturity level at some point .

Another assumption is return on equity will revert to a level in line with old mature companies. Companies like wonderla will generate roe slightly higher than average but in mature phase limited by capex requirement.

Discount rate is calculated using CAPM. Beta is adjusted if it is too high or low.

I also use a multi stage DDM in which company will grow at high rate for few years followed by slowdown to reach a mature phase. Within this I assume that roe will shrink faster as competition catches up whereas Growth opportunities will go down over a much longer period.


(Kiran K) #76

Motilal Oswal Buy report: http://ftp.motilaloswal.com/emailer/Research/WONH-20161209-MOSL-CU-PG008.pdf

Disc: Have position


(Growth_without Debt) #77

Motilal Oswal always gives very aggressive price target for wonderla. If they are so confident about the story why none of the their MF has hodling in Wonderla Holidays??


(Growth_without Debt) #78

Review past buy recommendations with agrressive up expectations from Motilal:

http://www.motilaloswal.com/site/rreports/HTML/635566606138525979/index.htm
http://www.motilaloswal.com/site/rreports/HTML/635908649049069309/index.htm


(S Khan) #80

The dreamworld queensland has reopened again on December 9 post some safety audits

attendance is low currently , it will be interesting to see if footfalls reach previous peak anytime soon.

don’t want to sound insensitive here , but fact of the matter is usually it appears such accidents dont actually close down the parks permanently , offending rides are often decomissioned for good though…

Purely from an investor perspective ,as this is a big risk for such parks , it makes sense to have some realistic appraisal of what can happen to park itself once such events occur.

Below recapping major accidents in parks of listed entities in india (imagica and wonderla) that iam aware of in last 3-4 years and their aftermath.

Two different accidents in adlabls imagica since it opened 3 years back :

  1. Two people were injured in bandits of Robinhood ride when it crashed mid-ride in Feb 2014. .
    Aftermath: imagica blamed the accident on the european ride vendor and had also sued them for compensation . Ride was permanently decommissioned. Park continued to function normally post accident.

  2. 4 year old girl drowned in the water pool in the aquamagica in March 2015
    Aftermath: police investigation happenned . management blamed negligence of parents of letting little girl unattended near a wave pool .not sure if any compensation was paid out but more prominent height restrictions near pool were put up which barred small kids from pool areas or water rides.Park continued to function normally.

In wonderla , most recent incident was drowning of a 12 year old girl in the wave pool in feb 2012.
Result :Police investigation and park was not closed or penalised . wonderla had blamed negligence of visitors who were part of a school picnic and seems to have exonerated themselves by highlighting the rapid reaction of their lifeguards on duty and existing safety measures provided

As an added advantage ,Wonderla is spread across multiple locations now , it can handle these type of black swan events better than a single location entity like imagica .ofcourse , a very big accident or recurring frequency of accidents could mar any brand permanently.

Disclosure : Invested, have added to position in last 1 month


(Kumar Saurabh) #81

@Yogesh_s Thanks Yogesh for very objective based discussion . Appreciate it.I am hooked up with some professional assignements. As per my valuation, I had got a valuation range around 300 - 330. Would be interesting to do relative comparison of our estimates. Give me 1-2 weeks.


(Kumar Saurabh) #82

@Yogesh_s Hi Yogesh, attaching my calculations, please check valuations sheet. My valuations are based on combination of historical performance as well as future guidance by management. Key assumption items:

  1. Basis for cash flow projection at park level: Calculation of CFO based on historical CFO/Sales Ratio
  2. 16% fall in CFO for next 10-12 years (13.8%) considered compared to 7 year historical CAGR(16.4%) based on current guidance of growth rates
  3. Projected numbers of Hyderabad park taken and adjusted due to flood issue
  4. Chennai plan considered (now considering high court issue, this assumption item need to be changed)
  5. Management had guided that post chennai park, every 3-4 years, one new park would come based on interbal accrual. I am assuming similar CAPEX with 10% CAGR cost escalation and similar revenue and cash flow numbers from new parks. For simplicity, I am assuming 1 more park to come
  6. Growth capex and maintenance capex numbers based on historical estimates
  7. Discount rate and terminal growth rate considered are 9% and 2% respectively
  8. This valuation is based purely on park operations historically which excludes any valuation related to:
    a. More than 130 acres of vacant land on existing 3 parks (plus if we assume similar land bank would be created on future parks, however, not considered here)
    b. Change in strategy from outsourcing restaurants to owning restaurant operations leading to increment in cross-sell non-ticket revenues and results visible in 1 year (in developed nations ticket to non-ticket revenue ratio is 60:40 and hence lot of scope for wonderla here, i have considered some ball park contribution from here, this is debatable)
    c. Contribution from bangalore resort business

Teh net price i am reaching is Rs 307 to 334. Lot of assumption numbers are debatable I agree. Please let me know your views.

Good part is this approach may be totally different from your approach,so, it is good mutual learning happening. Thanks a lot for your excel and also thanks for the great post on banking, really appreciate :slight_smile:Wonderla_Analysis.xlsx (150.6 KB)


(Kumar Saurabh) #83

Our discount rares r different n I may need to learn new things. DPartially disagree on fall of ROE due to competition due to strong barrier to entry, alternate sources of entertainment leading to competition can be explored


(Yogesh Sane) #84

Hi Kumar,
Thanks for sharing your model. It’s really comprehensive and covers a lot of future projections.as you said it is quiet different from the one I use which is more of a top-down one-size-fits-all kind of model. Your model is a bottom up model where you calculate numbers from the ground up. However, I think in such a model you should project key numbers like sales, profits, net worth, debt besides cashflows and ratios like growth, margins and ROE to to make sure that these numbers are consistent with peers and company’s own past. e,g, if your projections result in a ROE of 35% or a growth rate of 40%, then there should be some justification for these numbers.

Another consistency check to add is terminal price multiples. e.g. terminal PE or PS. This will ensure that exit multiples are in line with averages for similar businesses and valuation model does not assume multiple expansion (or contraction) that is unsustainable.

In my model, I use the exact same approach. I start with the assumption that any business will have a limited ROE which is likely to revert to an average which in turn will be close to nominal GDP growth rate. Hence I normally assume that in the long term strong businesses will generate an ROE of 15-20% in perpetuity while average businesses will generate ROE of 12-15%. In the short term, emerging businesses like Wonderla can and do generate high to very high ROE but that will fall. It’s not possible to say how but it’s not a question of how or if but rather when. A business like Wonderla will generate a good ROE for a long time but I am being conservative in my model as I do not think Wonderla will able to replicate it’s past high profitability in future parks. It’s future parks will have good profitability but not high profitability.

Another assumption is about terminal growth rate and growth opportunities. You have used 2% which I think is too low. It should be close to 7-8%. let me explain. A business cannot just keep growing forever. Wonderla cannot just keep adding parks in perpetuity. At some point they are going to saturate the market or lose their mojo. Whether it is in 10 years or 50 years is anyone’s guess. They can get into some other line of business but that cannot be assumed in advance. In mature stage, sustainable growth will be slightly less than nominal GDP growth rate (less because a mature business grows at less than average rate while a emerging business grows at above average). Nominal GDP growth rate in 10 or 20 years will less than current rate. since current nominal GDP growth rate is about 12-14%, I am assuming nominal GDP growth rate in 20 years will be 8-10% and growth rate of mature companies will be in the range of 6-10%. For the purpose of valuation, I project dividends and assume company’s dividend payout will be such that sustainable growth rate (ROE * (1-payout ratio)) is close to growth opportunities.

Another way of looking at terminal growth rate is that Wonderla will be able to increase prices 1-2% points higher than inflation and have 2-3% real growth rate in the form of higher footfalls, more parks, ancillary revenues like food and merchandise etc. If you assume inflation (in prices of discretionary items) to be 4% total growth rate works out to be 8% (4% +1.5% + 2.5%)

Next major parameter in the model is discount rate. You have used 9%. I don’t see how you have arrived at this number. Terminal value account for a large % of total value in a DCF model and it is very sensitive to terminal growth rate and discount rate. Even in your model, terminal value account for 40% of total present value. If I use discount rate of 13% and terminal growth rate of 8% I am getting a per share value of Rs 218. Of course I only changed these two numbers in the sheet. I will probably have to change few other numbers as well to get the correct value.

There should be a reasonable basis for deciding discount rate. I use the Capital Asset Pricing Model (CAPM) which adds an equity risk premium to risk free rate to arrive at the discount rate. Equity risk premium for the company is the product of equity risk premium for Indian stocks in general and company beta. Here, I use average beta for consumer discretionary companies (airlines, hotels, auto, retail etc) as beta for Wonderla is too low.

If everything works out as projected, your expected return on your investment is your discount rate. At 9% it is too low for anyone to risk their capital in a volatile business like Wonderla. If you use DCF to extract implied discount rate for mature businesses (ITC, Maruti, TCS HDFC etc), you will notice that discount rate is about 10-11%. I take this as a bare minimum as these companies are stable businesses with proven business models that aren’t going to go out of business anytime soon. their beta is also low at 0.8 to 1 reflecting their low relative risk. Any business that is far away from these conditions will be incrementally risky. Consumer discretionary companies have a beta of 1.2 to 1.6 due to volatile nature of their businesses and stock price. Wonderla fits in this league. Given the execution risk of future parks, I would not use a beta less than 1.4. That gives me a discount rate of 14%.

Another way of looking at discount rate is your opportunity cost. Since your expected return is your discount rate, just ask yourself if you have any other opportunities to earn more that 9% while keeping risks that are the same levels as Wonderla. Discount rate can be considered as the minimum rate of return that you want for you to risk your capital in this business.

By being conservative in my projections I am leaving a possibility that actual results are better than projected so actual returns are better than expected. That’s my margin of safety. Otherwise I am OK with 14%. Mr. Market will make an offer at my intrinsic value about once or twice a year.

Overall, I think your model is excellent in bottom up analysis and arriving at the projections for next few years based on the visibility. I will appreciate if you can just give me your projections for net worth, ROE and profits numbers for next 3-5 years so I can plug it in my model to see if I can close the valuation gap.