Fat Prophets' Hot Stock - Ardent Leisure

Friday 2nd September 2016

Game On!

What’s new?

The line of least resistance has been upwards lately for entertainment company Ardent Leisure after it announced the sale of its non-core health clubs business and then followed this up five days later with the release of its FY16 results. These announcements indicate to us that Ardent Leisure is seeking to transform itself by divesting from its non-core divisions to fund growth in its US Main Event business, with a turnaround in its Australian bowling division also gaining momentum.

With the market having been preoccupied over the last year or so with “peripheral issues” that included the performance of the health clubs and the competency of the new CEO, it now appears as though the penny is starting to drop, with investors gaining some clarity around what the future will look like for the company. We anticipate Ardent Leisure’s rerating will continue as the market reprices the Australian dollar denominated growth prospects of the Main Event expansion, while funding and debt concerns dissipate.

In our view, the Main Event business is set to become further entrenched as the “main event” for Ardent Leisure, with a pro forma adjustment of the FY16 result for the sale of the health clubs showing this segment making up half of group EBITDA. Growth in the Main Event business has been pushing ahead at full tilt, with 7 new centres opened during the financial year, bringing the total to 27. Significantly, 12 of these centres are now outside of Texas, and their success is supporting the case for a broader U.S roll-out.

The Australian-based Bowling and Games segment also delivered a strong FY16 performance with EBITDA growing 30.3 percent to $18.2 million on revenue growth of 12 percent to $130.5 million. This disproportionate growth in EBITDA to revenue was underpinned by the successful execution by management of their turnaround strategy to create a multi-attraction entertainment experience, improve customer service and targeted multi-channel marketing.

The theme parks segment, which will be Ardent Leisure’s remaining segment post the planned divestments, also performed well over FY16, underpinned by high levels of tourist activity on the Gold Coast, with a 36 percent year-on-year increase in visitations from China leading the way. This, in combination with rising customer satisfaction levels and the popularity of the company’s themed food and beverage outlets helped to drive revenue growth of 8 percent to $107.6 million and EBITDA up 8.5 percent to $34.7 million.

Outlook

The planned sale of the Health Clubs business is expected to further entrench Main Event as the “main event” for Ardent Leisure, with the segment likely to account for nearly half of group EBITDA. Growth in the Main Event business is expected to be 30 – 40 percent as the centre roll out strategy continues across the US. This is expected to be supplemented by the ongoing investment in improvement strategies for Bowling and Theme Parks.

Price

From a valuation perspective, Ardent Leisure is trading at 19.1 times the earnings estimate for FY17, with this expected to fall to 15.7 in FY18, while the prospective dividend yield for FY17 is 4.7 percent. Complementing what we consider to be appealing fundamentals is Ardent Leisure’s favourable technical set up, with both longer-term trend and momentum currently in favour of the bulls.

Worth buying?

We expect the sale of the Health Clubs (and potentially also the Marinas) division to remove a key distraction from managing Ardent Leisure’s core business, while also providing the necessary capital to management’s various growth initiatives. Assuming that Ardent Leisure’s divestments all go according to plan, then we also see the potential for some form of capital management over the near-to-medium-term.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Ardent Leisure is held in the Fat Prophets Income and Australasian Share Model Portfolios.

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