This morning, film software provider Vista Group International Ltd (ASX: VGL) announced that it has received the first of two regulatory approvals required to set up a new Chinese joint venture with Weying Technology Co, Limited (WePiao). WePiao is backed by Asian technology giant Tencent Holdings as well as the China Cultural Investment Fund and leading Chinese cinema chains.
WePiao owns a smart phone cinema ticketing app that is embedded into WeChat, a messaging app which boasts 600 million monthly active users. Aided by WePiao's extensive market reach, it is hoped that the joint venture will accelerate the growth of Vista'a world leading software in China which is the fastest growing film market in the world.
As part of the deal WePiao will acquire shares in Vista's Chinese subsidiary, Vista China, for cash as well as provide additional growth capital for the business. It will also subscribe for up to 2% of new shares in Vista Group. Vista China will enter into a long term distribution agreement with Vista Group for its software and will pay upfront fees as well as ongoing maintenance fees for these rights.
Vista expects to receive NZ$30 million in cash from the arrangement in the first year after it is finalised, excluding any proceeds from the proposed 2% share subscription. The terms look very attractive for Vista given the group's Asian revenues were just NZ$4.2 million last year.
Vista Group listed on the ASX in 2014 with a stable of six software businesses. Vista Cinema is the largest of these boasting a 37% global market share and cinema chains use it to manage operations. The group's other software covers film distribution, marketing and ticket sales for both large and small customers.
Vista continues to extend both its product suite and customer relationships through acquisitions. In February 2015 the company bought US based Ticketsoft which provides point of sale and online ticketing software and more recently acquired 50% stakes in Share Dimension and Powster Limited. Share Dimension provides business intelligence solutions for cinema exhibitors and Powster is a creative marketing company focussed on the the film industry.
In 2015 Vista recorded an impressive 60% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$15.1 million on the back of a 39% increase in revenue. It also posted NZ$9.0 million of adjusted net profit exceeding prospectus forecasts by 11%.
The company had NZ$22.5 million in cash after adjusting for debt at 31 December 2015 and so based on 2015 financials, Vista has a demanding enterprise value-to-earnings multiple (EV/E) of 52.5. It is therefore a little too expensive for my liking despite the fact it dominates an attractive niche market and is well placed to benefit from China's burgeoning consumer class.
