Ardent Leisure (AAD.ASX)

Fat Prophets

Friday 13th November 2015

Hot Stock: Ardent Leisure (AAD.ASX)

Time to focus on the real attraction

What’s new?

Ardent Leisure delivered a reasonable first quarter trading update last week with group revenue ahead by 19.3 percent on last year and earnings up 8.9 percent. The market though appeared to draw a different conclusion with the shares the biggest faller on the ASX on the day, down 13.6% to $2.48.

In terms of the headline numbers, Ardent Leisure’s unaudited revenue for the three months to 30 September 2015 increased 19.3 percent on a year ago to $166 million, while total divisional first quarter EBITDA (earnings before interest, tax, depreciation and amortisation) was up 8.9 percent to $37.2 million.

At a segment level, the Main Event business was once again bowling them over with total revenues rising 30.8 percent on the prior year to US$37.42 million and EBITDA up 29.2 percent to US$8.33 million. Importantly, the company is continuing to push ahead with its expansion, and plans to open 7 new entertainment sites (bowling and laser tag the centerpieces) in the second half of FY16 and 8 in FY17. This will bring the total number to 35, which would be a 75 percent increase on the current portfolio of 20 centres.

There are of course other strings to Ardent Leisure’s bow, with the Theme Parks division recording total quarterly revenues of $27.01 million, which was 6.3 percent ahead on the prior year, while EBITDA was up 4.8 percent to $10.08 million. Management is continuing to invest here and is developing a ‘Dreamworld Master Plan to create a world-class entertainment precinct’ in advance of the 2018 Commonwealth Games in the Gold Coast.

The company’s Australian bowling centres also performed robustly during the quarter with earnings ahead 12.2 percent to $6.97 million. Ardent’s marinas operation also chipped in with a $2.04 million profit.

The main blight on the result (and possibly a key reason why investors took fright) was the company’s health clubs unit. Earnings here came in at $6.45 million for the quarter versus $8.81 million the same period last year. While the health clubs are no easy fix, management has responded, and we are encouraged to hear that the conversion of clubs to a 24/7 format is having a positive impact.

Outlook

In our view, the market has become too distracted by the problems, which are being addressed, in the health clubs business, and as a result are not focusing on the substantial earnings growth story at the Main Event unit in the US. This, in combination with a lower Australian dollar, which is boosting US earnings translations while also adding support to the Theme Parks business, look set to drive the Group’s earnings growth over the medium-term.

Price

Ardent Leisure’s shares are currently trading on an attractive earnings multiple for 2016 of 18.5 times (15.5 times for 2017) and offering a yield of 5.3 percent. This appears consistent with a firming technical outlook. For these reasons, we expect upward momentum to return over the coming weeks.

Worth buying?

In our view last week’s trading update saw the market place far too much emphasis on the underperforming health clubs business where remedial measures are well underway, and working. We believe the market also hasn’t really got a grip yet on the earnings gains set to flow in future years from the Main Event business. And even more so if the Australian dollar continues to weaken against the greenback. The company’s theme parks business in Australia should also be a winner in such a scenario.

Greg Smith is Head of Research 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 Model Portfolio.

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