Cityneon downgraded by CGS-CIMB amid high leverage

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CGS-CIMB downgraded Cityneon to Hold from Add, pointing to the company’s shift in strategy, rising net gearing and higher receivables.

It noted Cityneon currently has seven exhibits, with plans for at least nine to ten permanent and travelling sets by the end of this year. Management appeared most optimistic on Jurassic World, among the company’s four licensing rights, as the exhibit has seen strong visitation and demand from other cities, it noted.

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

In addition, CGS-CIMB said it was concerned by the 45.8 percent on-year increase in operating expenses in the first quarter, on higher depreciation and staff costs. The company’s net gearing also rose 1.5 times from 1.4 times at the end of last year, it noted.

“We expect net gearing to remain elevated in the near term with the company still in expansionary mode,” it said.

Cityneon’s first-quarter net profit rose 80.4 percent on-year to S$4.0 million, CGS-CIMB noted, adding it was 17 percent of its full-year forecast and in-line with its expectations as it forecast stronger contributions ahead from higher royalty income and more contract wins in the intellectual property segment.

CGS-CIMB cut its 2018-20 earnings per share (EPS) forecasts by 0.9-6.7 percent on higher depreciation and financing costs, leading it to lower its target price to S$1.16 form S$1.58.

The stock ended Tuesday down 2.83 percent at S$1.03.