Australia | Oct 10 2007
By Chris Shaw
At the end of last week Macquarie Leisure ((MLE)) stood among the most highly rated stocks on the Australian market, the FNArena database showing it as scoring a perfect five-for-five in terms of Buy ratings from brokers that cover the company.
It is time to add a couple of more to the list, with UBS and Austock Securities both initiating coverage on the company this week and both also rating it as a Buy on the back of expected solid earnings growth in coming years.
UBS list a number of reasons to like the stock, citing its attractive assets (the company owns Dreamworld, WhiteWater World, a marino portfolio, a range of tenpin bowling centres, the Main Event family entertainment centres and a portfolio of Goodlife fitness centres), the strong cash flow they generate, the aggressive approach of management where the focus is on expansion and the scope for margin improvement.
The broker points out the company generates stable cash flows from the Dreamworld and marina assets and this can then be used for expansion into higher growth areas, with the Main Event family centres and Goodlife fitness centres seen as base assets from which to effect further industry consolidation.
Austock suggests both assets are also ideal for ongoing organic expansion and expects 3-5 new sites to be rolled out annually in coming years, which it estimates could add as much as $100m to group revenues by FY10.
The broker also sees scope for further overseas expansion in both divisions, Main Event already adding locations in Texas in the US and Goodlife likely to consider both New Zealand and Asian opportunities in the years ahead.
UBS point out management to date has a solid track record in terms of improving performance from assets under ownership, which supports the broker’s estimate of a capitalised annual growth rate in earnings per share (EPS) of 19% through FY10.
In terms of earnings forecasts, the broker expects EPS to grow from the 16c recorded in FY07 to 21c this year and 24c in FY09, both of which it suggests are in line with market consensus forecasts. Austock is a little more aggressive and sees EPS this year of 22.2c, increasing to 25.8c in FY09.
The major risk to the respective numbers would appear to be a downturn in discretionary spending given the assets are based on leisure activities, but with the Australian economy forecast to record another year of solid growth in 2008 this doesn’t appear to be a significant immediate concern.
Investors chasing dividends should also do fairly well, UBS forecasting payouts of 20c and 23c in FY08 and FY09 and Austock 21c and 23.6c respectively, putting the stock on a yield of close to 6% for FY08.
UBS has commenced coverage with a price target of $3.85 while Austock has set its target at $3.70, which compares to an average price target according to the FNArena database of $3.79. For further comparison Thomson One Analytics shows a median price target on the stock of $3.83.
Shares in Macquarie Leisure today are slightly higher and at 12.00pm were up 1c at $3.43, which compares to a trading range over the past year of $2.50-$3.62.