First Downgrade For Macquarie Leisure

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By Chris Shaw

For some time Macquarie Leisure ((MLE)), the owner of Dreamworld and WhiteWater World, bowling, fitness and entertainment centres and marina assets, has been among the most highly rated stocks in the FNArena database, but recent share price gains have seen the first break from what had been a perfect scorecard in terms of broker Buy ratings.

UBS has been the first to suggest the stock has rallied too far, downgrading its rating to Neutral from Buy following the company’s first quarter FY08 trading update that showed operations largely tracking in-line with expectations.

Some compositional differences were noted with Dreamworld performing slightly lower than expected but the broker points out this was offset by stronger results from the Main Event division.

For GSJB Were the highlight of the quarter was the strong performance of the bowling centre assets, the broker suggesting it offered evidence of the success of management’s strategy.

This offers some scope for upside to earnings in coming periods in its view and this may entice something of a re-rating in the stock as investors factor in the additional potential. The broker also sees some upside risk for Dreamworld given the peak summer season is approaching and a reduction in discounting means margins are trending higher. A full summer season for WhiteWater World should also be a positive for Dreamworld in the broker’s view.

Medium-term UBS also sees scope for the Goodlife fitness centre operations to generate an upside earnings surprise if the proposed rollout program can be accelerated, so despite downgrading its rating the broker retains its favourable view on the outlook for the company.

Following the update brokers have not made any significant changes to earnings forecasts, with UBS’s EPS (earnings per share) forecasts at 21c in FY08 and 24c in FY09, while JP Morgan is expecting 20.9c and 24.9c respectively and GSJB Were forecasts 16c and 18.9c.

The FNArena database now shows the stock as rated Buy six times and Neutral once, with an average price target of $3.79. Thomson One Analytics shows a median share price target of $3.85.

Shares in Macquarie Leisure this morning are little changed and as at 11.30am were 1c lower at $3.67.

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