A clean strike
Recently, Ardent Leisure (ASX:AAD) disclosed that it was selling its Bowling & Entertainment division to The Entertainment and Education Group as part of management efforts to divest ‘less lucrative’ operations. This in turn caused the company’s shares to surge above $2.00, up over 17% from the lows in December. This is likely due to the improving prospects for Ardent as it frees up capital and focuses on operations that can yield the highest returns.
Recap and What’s new
Previously, in our coverage of Ardent Leisure (ASX:AAD) back in November (FAT-AUS-848), we noted the changes at the top which seemed similar to a game of musical chairs.
On the other hand, we have Simon Kelly, who was the CEO at the time, took over the Chief post in April 2017 from Deborah Thomas following the tragedy at the Dreamworld theme park. Mr Kelly then left the post shortly thereafter with only a few months under his belt. In the interim, CFO Geoff Richardson is taking the helm as the company seeks out a replacement CEO who is likely to be based in the US.
Unsurprisingly the market interpreted this negatively, pushing the company’s share price downwards from $1.83 on the date of the announcement (08 November 2017) before bottoming out at $1.70 in mid-December.
Though the changes at the top may be disconcerting for some investors, we believe that this isn’t a major cause for alarm as the recent leadership (the likes of Dr Gary Weiss and Brad Richmond) that entered the firm seem to have the necessary vision and willpower to steer Ardent back to the growth path.
In mid-December, the company then announced a positive business update which caused the shares to rally over 17% on the back of a binding sale agreement with The Entertainment and Education Group (TEEG) for Ardent’s Bowling & Entertainment division (“B&E”) which will be the focus of today’s report. TEEG is a partnership between Quadrant Private Equity and the Timezone Group.
Source: Ardent Leisure (ASX:AAD)
According to the announcement in December, TEEG has offered $160 million on a debt and cash free basis, which in M&A (Mergers & Acquisition) terms means that the seller (Ardent) gets to keep all cash and pays off all debt at the time of the sale of a business. The sale is expected to be completed within the first half of 2018 and remains subject to the satisfaction of stakeholders such as landlords and Ardent’s lenders.
We believe that Ardent has done well in the negotiations as the sale price of $160 million for the B&E business pegs the valuation at 27.1x FY17 Core EBITDA and 32x FY17 Core EBIT. This will simultaneously strengthen the company’s balance sheet position and allow even more solid ground for the expansion of the Main Event Entertainment venues across the USA.
Source: Ardent Leisure (ASX:AAD)
This expansion thrust, in our view, makes investing in Ardent Leisure compelling given the relatively low payback period (compared to theme park investments) with each centre expected to deliver a return of investment above 30% according to management.
An additional benefit of selling off the B&E division, in our view, is that it frees up the company from having to set aside capital to refurbish older B&E centres as well as no longer needing its attention on the division’s turnaround efforts. We like that this effectively makes company focus exclusively on the higher yielding Main Event centres and focus on rebuilding the Theme park brand.
A strike in our view.
Image Credit: Imran Valibhoy
Turning to the daily chart, overhead resistance is situated at the January intra-month high of $2.10 as shown by the horizontal thin-red line. Therefore, in order for the short-term technical landscape to further strengthen, a sustained break above this price range is required. However, it should be noted that the rapid increase in share price has resulted in the RSI to weaken from overbought territory (exhaustion of short-term upward momentum). Hence, should the bears continue to exert downward pressure over the near-term, then a temporary pullback in price could follow. Positively, should this occur, we would view this temporary pause as corrective. Medium-term momentum is in favour of the bulls, as the share price has comfortably cleared both the 50 (red line) and 200 (green line) day moving averages.
With reference to the monthly chart, a protective level of support is indicated at the 78.6% Fibonacci retracement of $1.66 as marked by the blue set of retracements, should the bears remain lurking over the near term. In order for the long-term technical outlook to improve, a decisive clearance of resistance situated between $2.18 and $2.27 is required. This consists of the June 2017 high and 38.2% Fibonacci retracement as represented by the red set of retracements respectively. Should this favourable scenario unfold, this this would increase the probability of further gains to be had over the broader horizon.
Summary
In mid-December, Ardent Leisure (ASX:AAD) announced that it would sell its Bowling & Entertainment division to The Entertainment and Education Group as part of management efforts to divest from ‘less lucrative’ operations.
This will also free up capital and allow more focus on operations that can yield the highest returns, such as their Main Event Entertainment Centres in the USA which we believe to be the real growth engine. It will also facilitate the rebuilding of the Theme Park brand.
In the interim, the company is also in the midst of reshaping the management team following the departure of their short-tenured CEO Simon Kelly. We nevertheless view this change with confidence given the appointments of Gary Weiss and Brad Richmond to the board.
Overall, despite much shuffling in personnel, we still believe that the investment case for Ardent remains very sound.
The growth outlook for the Main Event business is robust longer term, and rising tourism conspiring with a normalisation of attendances at the Gold Coast business, bode well for the domestic earnings recovery story.
Accordingly, and with the shares trading on an earnings multiple of around 28.3 times for FY19, we are comfortable retaining exposure to the shares. Ardent Leisure (ASX:AAD) will remain held in the Fat Prophets Portfolio.
Disclosure: Ardent Leisure (ASX:AAD) is held in the Fat Prophets Income and Australasian Share Model Portfolios.
