Australia | Feb 17 2011
– Ardent's result provides a big positive surprise
– Share price jumps but yield still attractive
– Analysts see more upside
By Greg Peel
It was back in November when Ardent Leisure ((AAD)), operator of theme parks, bowling alleys, marinas, health clubs and family entertainment centres here and in the US, posted its first quarter FY11 update. Stock analysts saw some very positive signs emerging at the time. (See Ardent Supporters Cheer)
The point was that when one looks at the business of frivolous entertainment, there is never going to be a worse impact than a GFC. When you don't know where your next dollar's coming from, you don't blow the one you've got on the rollercoaster. Leveraged trusts were beaten down enough as it was on debt concerns, but as consumer purses zipped post-stimulus, Ardent really hit its nadir in FY10.
Ardent's first quarter result was, nevertheless, very encouraging. It wasn't fantastic, but it did suggest the worst had been seen and that FY11 would bring a gradual recovery. The real attraction, however, was that Ardent had reduced its debt to manageable levels and deftly controlled its costs, yet the yield on offer was a lofty 10% on FY11 forecasts. Ardent was not junk, it just needed the punters to return.
It had already been a bit of a wet winter, but no one was quite prepared for the weather in South East Queensland as spring gave way to summer. We are reminded that meteorologists attribute the January floods to the saturation of the landscape given prior relentless rain. Where do you go for entertainment when it's bucketing down? Whitewater World? One would think not. The market certainly thought not, and as such the Ardent units continued to lose valuation ground over Christmas which only served to push up that available yield.
But they came. The punters weren't exactly busting the doors of Dreamworld down, but compared to a year ago theme park sales were up 7% when JP Morgan, for one, was expecting a 2% decline. Indeed, all brokers were caught out by the resilience in attendance and the pull of market share away from theme park rival Village Roadshow ((VRL)). To counter desperate discounting from Village, Ardent had introduced its $69 “World Pass”. And it worked, quite spectacularly.
Ardent is not just theme parks of course, but all five business units performed well in the half. Little more evidence is now needed that FY10 represented the bottom of the earnings cycle. And before you say “what about January in Queensland?”, management confirmed that January also saw stronger revenues across all businesses, including the parks, albeit no full year guidance was offered.
And Ardent hasn't been sitting still either, with the Skypoint Observation Deck now open, new rides planned, further health club, Main Event and bowling alley acquisitions targeted, and further growth opportunities sought. Ardent does not intend gearing to exceed 45% and as Macquarie puts it, “the group's ability to manage costs has never been in doubt”.
Which serves to underpin that high yield. There is, however, one problem. On the release of Ardent's shockingly good result yesterday, the unit price jumped 17%. A $1.17 stock quickly became a $1.37 stock and as a result, the FY11 forecast yield has fallen to 9.0% (consensus of the six brokers in the FNArena database covering Ardent) and the FY12 yield to 10.1%.
But such yields are hardly to be sniffed at, and despite yesterday's price surge analysts see further capital appreciation ahead. The consensus target price from those six brokers has jumped to $1.46 from $1.17 on a spread from $1.30 (BA-Merrill Lynch) to $1.65 (Deutsche Bank). I am omitting UBS ($1.20) which did not update its view this morning.
Deutsche's big target increase to $1.65 from $1.00 unsurprisingly sparked a rating upgrade from Hold to Buy. Four of the other six brokers already had a Buy rating which just leaves Merrills on Hold.
While acknowledging a “stellar” result, Merrills remains a little wary of the typical seasonal downturn in the cooler months and without full year guidance does not want to get carried away. Merrills' target already was at a high-end $1.30 and there it remains. The big surge in price yesterday means the market has caught up and so the broker is sticking to Neutral for now on valuation.
Obviously the retail environment in Australia is currently weak, and a flood levy is not going to help. Entertainment spending however appears to be on the bounce and the RBA's commitment to steady rates for a while, along with low unemployment, should provide support. But again we look at that yield.
Tuesday would have been a better day to buy, but most brokers believe Ardent's re-rating is still an ongoing story.
