Still Along for the Ride
Ardent Leisure (ASX:AAD) recently released its half-year results, showing that there is still a lot of work to do given the declines on the top and bottom lines compared to last year’s results. However, we are pleased to see that there have been improvements in the Theme Park and US-based Main Event businesses so far in the second-half while the selection of a CEO for the Main event business will give it the needed direction.
Recap and Updates
A brief recap, in our previous coverage of Ardent Leisure in January (FAT-AUS-856) we looked specifically at management’s efforts to sell off Ardent’s Bowling & Entertainment division (“B&E”) for $160 million to The Entertainment and Education Group (TEEG), causing the company’s share price to rally over 20% to peak at $2.06. The deal is expected to be completed within this quarter.
We applaud management’s decision to divest from the ailing business while securing decent valuations on the B&E operations. Furthermore, the deal will also strengthen the company’s balance sheet as it gets to keep all cash and pay off all debt at the time while freeing up capital for the expansion of the Main Event Entertainment venues across the US.
This expansion thrust, in our view, makes investing in Ardent Leisure (ASX:AAD) 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.
Since then, the company has provided an update on its Interim Results and in a separate filing, named Mr Christopher Morris as the new Main Event Chief Executive. Mr Morris has an extensive background of running food and beverage businesses with his most recent appointment as the President of California Pizza Kitchen where he revitalised the 32-year old business into a more relevant brand and generating same-store sales growth.
And before moving on to results, a note to investors, Ardent has moved to a retail calendar basis for their financial reporting. This change would lead to better comparability as each reporting period will now cover 184 days per cycle. The current year FY18 is a transitional period with the financial period for the “first-half” of FY18 being 1st July 2017 to 26th December 2017 (179 days) compared with 184 days for the first half (1H) of FY17.
In our interim results review below, pro-forma financial information for the 184-day period to 31st December 2017 has been used instead of statutory information.
Interim Results – covers 184 days (1st July to 31st December) for comparison purposes
Starting from the headline numbers, revenues for the period were lower year-on-year by 12.1% to $278.8 million. This was mainly due to the fact that this included the soon to be discontinued operations (Marinas and Health Clubs) which account for all of the decline. Though this was offset by the continued operations in the Main Event and Theme Parks which, combined, grew 12.7% year-on-year to $201.2 million.
Source: Ardent Leisure (ASX:AAD) 26 February Company Presentation
Breaking it down to the segments and starting with the Main Event business, this is now the dominant contributor, accounting for over 80% of 1H18 continuing operation revenues. This segment also delivered the strongest result, up 25.4% year-on-year in US$ terms (+19.9% in AU$). Pro-forma EBITDA from the segment was at $14.7 million, up 11.7% on the prior corresponding period.
The growth in sales reflects the segment’s expansion of 9 stores in FY17 as well as the new centre in Knoxville, Tennessee during the 1H18. Constant Centre sales (same-store) growth was 1.3% for the interim as the segment passed the nadir with improvements in walk-in numbers and marketing efforts taking effect. Though growth was ultimately subdued due to the impact of the Holiday school breaks and the Hurricane Harvey.
Going forward to the 2H18, the business appears to have carried the momentum forward as constant centre sales growth is up 3% over the 33-week period ending on 13th February 2018 while overall top-line is set to grow on the back of 3 new centre openings.
Source: Ardent Leisure (ASX:AAD) 26 February Company Presentation
Moving on to the Theme Park business, the business continues to reflect the impact of the Dreamworld incident with revenues dropping 11% year-on-year to $37.2 million. Pro-forma EBITDA still reflects a loss of $24.7 million though this has improved 72.3% year-on-year factoring in resumption of operations and insurance recoveries.
The plus side, however, is that following the tragedy, the company has now doubled down on improving safety while enforcing stricter audits. This in turn has led to a recovery in attendance numbers, and according to the latest tally, attendances are up 32.6% and revenue is up 55.6% for the period from 10th December to 13th February compared with the same post-incident period in FY 2017.
Source: Ardent Leisure (ASX:AAD) 26 February Company Presentation
Finally, we look at the soon to be discontinued B&E segment which reported a recovery in revenues up 16.6% year-on-year to $75.0 million from the opening of new venues and reopening of renovated centres. Pro-forma EBITDA has also improved 34.8% year-on-year to $9.9 million for the same cause. Though, again, this business has been acquired by The Education and Entertainment Group for $160 million and will no longer be contributing by the 2H18.
All in all, Group level Pro-forma EBITDA has now moved back to the positive to $2.5 million from lower impairment charges relating to Dreamworld and growth in the Main Event business. Factoring in depreciation and tax charges, 1H18 Net Loss after Tax is at $13.2 million though a substantial improvement from last year’s $49.3 million loss.
Stronger Business
Referencing the graphic below, the company’s balance sheet is set to improve significantly following the completion of the B&E deal turning net debt into a net cash position of $19.1 million.
Source: Ardent Leisure (ASX:AAD) 26 February Company Presentation
Turning to the charts, and on the daily, prices have broken below both the 50 day (red line) and 200 (green line) moving averages which is suggestive of momentum to have rotated south. If the bears were to remain in control over the near term, then support is sighted at the February low of $1.82 as marked by the horizontal blue line. In order for the short-term technical landscape to improve, a sustained break above the February high of $2.01 as shown by the horizontal thin-red line is required. Should this occur, then momentum would once again shift in favour of the bull-camp.
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
Ultimately, we are pleased with Ardent Leisure’s 1H18 results given the improvements evident in the Main Event and Theme Park operations. We also are encouraged by the positive momentum being exhibited so far in the second-half.
The company’s shares are also currently trading at a lofty earnings multiple of 152 times earnings, but this is set to drop to 33 times in the FY19 period. The turnaround is taking a while, but we remain heartened by the tremendous growth potential on offer at the Main Event business. We retain our HOLD recommendation on Ardent Leisure.
Disclosure: Ardent Leisure is held in the Fat Prophets Income and Australasian Share Model Portfolios.
