Australia | Aug 19 2014
-Main Event key catalyst
-Reduces pay-out ratio
-More upside potential
By Eva Brocklehurst
Ardent Leisure ((AAD)) delivered a strong outcome in FY14 after a year of investing in growth. The company's recent acquisition of Fitness First centres in Western Australia is incorporated into forecasts, with the full year results holding few surprises after being flagged along with the acquisition announcement.
Corporate costs stepped up over FY14 with the further roll out of the Main Event division. Six Main Event sites have been secured for FY15 and a further seven are expected to open in FY16. The base is set for a robust earnings profile over next three to four years, in CIMB's view. Investors appear more willing to focus on the medium term growth outlook. Main Event delivered earnings growth of 27% in the year and theme parks and marinas also beat CIMB's expectations. Health club earnings were driven by acquisitions and the acquisition of WA Fitness First centres is expected to deliver synergies in FY15. Macquarie notes health clubs revenue grew 3% in July, which suggests only marginally positive constant centre growth, but the company appears comfortable with the momentum.
Ardent Leisure provided no guidance on FY15 but Deutsche Bank observes July trading was positive. A Buy rating is retained as the stock is trading 12% below the broker's $3.30 target. Macquarie, while maintaining a positive outlook on the growth strategy, considers this is largely reflected in the valuation and sticks with a Neutral rating. The broker remains focused on how well the Main Event expansion is executed. Macquarie likes the fact Ardent Leisure is investing in the Main Event cost base at an early stage. There was a 48% increase in corporate overheads but this expansion is now largely complete. The company did emphasise earnings per share is likely to grow ahead of dividends as it retains more funds to cover the expansion of Main Event. A pay-out ratio of 85-90% of core earnings is considered more appropriate over the medium term, against the previous pay-out of 90-94%.
Bowling was the main area in which revenue did not show any material improvement. However, margins improved and the company is confident the top line will turn around. To Goldman Sachs the outlook emphasises US growth and cost savings in Australia. The mature Australian businesses of theme parks, bowling and marinas remain strong but the broker expects Main Event to contribute 52% of earnings by FY18. That business increases in complexity with the expansion but Goldman is confident the management team is in place to handle the extra pressure.
JP Morgan was encouraged by signs of a turnaround in bowling and the continued success with the acquisition of health clubs. Bowling should benefit from a new facility in Darwin, given the lack of competition in the region. Still, incremental results from new Main Event sites are the catalysts. UBS is awaiting Main Event's growth acceleration but also wants to see more evidence of a strategic turnaround in bowling and return on investment, as well as yield uplift from the initiatives on theme parks such as digital marketing.
An improvement in the macro economic backdrop in terms of domestic tourism and discretionary spending would also be helpful. The company is positioned to benefit from a falling Australian dollar through foreign earnings translation as well as an improvement in domestic consumer spending. UBS observes this situation is unique, unlike retailers or travel agents, which benefit from either of these factors to some degree but not usually both. Goldman believes that the company's portfolio of low-cost entertainment options should provide support against any consumer weakness. Moreover, falls in the Australian dollar should prove beneficial. Goldman calculates that as US earnings are now unhedged, a US1c fall in the Australian dollar adds 0.6% to FY15 earnings.
The company has outperformed the ASX small cap industrials by 50% over the year and is now trading at a premium of around 20%. UBS expects, from a three-year distribution yield and growth perspective, a yield of 5-6% and 15% distribution growth, representing total returns of 20% per annum. Such a firm outlook means UBS retains a Buy rating, based also on the long-term roll out of around 90 Main Event centres.
FNArena's database has four Buy ratings and one Hold. The consensus target is $3.11, suggesting 3.7% upside to the last share price, and compares with $3.03 ahead of the results. Targets range from $2.70 (Macquarie) to $3.30 (Deutsche Bank). The dividend yield on FY15 and FY16 forecasts is 5.0% and 5.8% respectively.
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