what is the good or the bad news, page-18

Hi Liam,

Sorry, to have to disagree with you on your assessment.

In FY02, Val Morgan incurred an $8.9m EBIT loss (before individually significant items). In FY01, VM EBIT was $631K.

In FY02, all VM operations were loss making, with the exception of the USA.

In September, VM exited the USA in return for novation of existing theatre rental contracts, an upfront payment of $7m, a 2-year revenue sharing arrangement with ScreenVision (to a maximum earnout of US$4.0m in each year), and a 3-year revenue sharing arrangement concerning the Malco cinema circuit.

The USA theatre rentals were included in Note 33 to the FY02 Annual Report. In part, Note 33 included $214m in ongoing theatre rental commitments (for the next 5 years), including $53.6m relating to the USA exit.
$57m of this amount was to fall due for payment in FY03.

Note 33 states that the entire $214m related to non-cancellable contracts. Enforceable, non-cancellable, and recoverable formally (ie: through insolvency), or otherwise (through a negotiated settlement).

In FY02, cinema advertising revenue totalled $99m, EBIT was -$8.9m, segment assets were $65m, and segment liabilities were $104m. Of these amounts, USA accounted for $29m in FY02 cinema revenue, other overseas operations accounted for $11.6m, and the Australian cinema operations accounted for $58.4m.

Even accounting for a 25% EBIT margin on the USA, breakeven on "other" and losses in Australia, the USA operations contributed ~$7m in EBIT, and the Australian operations LOST ~$16m (for a -27% EBIT margin).

Leaving to one side the novation of the theatre rental contracts, the USA exit will earn TMS ~$25m (~3.5x EBIT, assuming a 25% margin; higher, if the EBIT margin is actually, less).

The reality, however, is that the USA EBIT margin was 10 -15%, off a small revenue, and the Australian theatre operations was ~-30%, off a revenue base twice the size of that of the USA.

Conversely, Global TV's EBIT margins exceed 11% and are growing.

Chances are, however, that you are a subscriber to Fat Prophets. Until TMS fell over last year, Fat Prophets rated TMS a strong buy, almost entirely on the basis of an anticipated recovery in the cinema advertising business. Little support or credence was given to the Global TV business.