Wonderla's high valuations look sustainable

Rising footfalls, strong earnings outlook provide comfort

The stock of India's largest amusement park chain — Wonderla Holidays (Wonderla) — is trading at premium valuations not just to its domestic peer (Adlabs Entertainment), but also to most global peers such as Disney, Six Flags, Cedar Fair and Sea World Entertain-ment, among others. At current levels, Wonderla is trading at 28 times FY18 estimated earnings, whereas its global peers are trading anywhere between 15 to 26 times CY18 estimated earnings. Although any comparison with global peers is a far cry, the question is can the stock sustain these valuations?

A business model, which allows the company to set up quality parks with relatively lower costs, and consequently report healthy profitability and return ratios are a few reasons behind the premium valuations. In fact, the company has been able to achieve a payback period of less than 10 years for new greenfield investments, which is among the best even when compared to global peers. The payback period is the length of time required to recover the initial investment in a project.

Of its three parks, Kochi became free cash positive in the first year itself and Bengaluru in the second year. Its Hyderabad park, which was started in April 2016, is also seeing continued healthy footfalls and contributed 21 per cent to the December quarter revenues. Given Wonderla's track record, most analysts believe this park, too, could achieve break-even in the next two-three years. In this backdrop, most analysts believe Wonderla's premium valuations are sustainable going forward as well. 

Although this financial year's profits will be under pressure as costs related to the Hyderabad park will loom large, most analysts expect things to improve thereafter. According to Bloomberg consensus estimates, Wonderla's revenue and net profit are expected to post compounded annual growth of 27 per cent and 28 per cent, respectively over FY18-20. This would boost its return on equity ratio to 20 per cent by FY20 from 15 per cent in FY18. 

Wonderla's only listed domestic peer — Adlabs Entertainment — owner of Imagica theme parks, though not strictly comparable, offers a different proposition to visitors. Positioned as a holiday destination, the park also has its own intellectual property (IP)-based content, which is in sync with the design of rides and also has its own merchandise. While this offering is on the lines of Disney, it requires high capital expenditure and typically takes more time to break-even. While Adlabs is a longer-term bet, Wonderla has replicated its low-cost high-profitability model in different parks and displayed strong execution track record. Ability to continuously draw high footfalls is key for growth and profitability of these amusement parks. By adding new rides and parks, both companies are aiming to step up footfalls. So, any significant drop in footfalls is a key down-side risk.

Overall, most analysts are positive on Wonderla and expect stock price returns of about 18 per cent from the current levels of Rs 377.