Australia | Feb 20 2015
-Main Event the driver of growth
-Texas resilient despite oil fall
-Risks rise with model changes
By Eva Brocklehurst
Gym members deserted Ardent Leisure's ((AAD)) health club segment in a significant way in the first half. This was a key area of weakness and a surprise to brokers, with the share price falling sharply in reaction to the news. Health club revenue was boosted by acquisitions but earnings were down 9.0% in the half.
The suddenness of the fall in gym membership is of concern to Goldman Sachs. The attrition was attributed to members shifting to "convenience" or 24-hour gyms. The broker observes Ardent Leisure is intent on quickly stemming the outflow, with plans to convert 14 of its 77 gyms to a hybrid full service/24-hour access model in the second half. Staffing on weekends and public holidays will be reduced to cut costs. A risky, but essential, step in the broker's view.
Otherwise, the Main Event family entertainment assets demonstrated resilience in the US state of Texas, despite a lower oil price. There appears to be no impact on corporate bookings from the downturn in oil prices. Indeed, the broker notes many corporations are moving headquarters to Texas, including Toyota and Mobil. While 14 of Main Event's 19 centres are in Texas it appears lower fuel prices have spurred consumer spending in the US. Goldman remains wary that corporate downsizing may dampen spending and expects the rolling out of new centres will be the driver of growth, rather than Texan sentiment.
The broker is relieved that those centres being opened outside Texas are also trading strongly, having feared lack of customer awareness and greater competition in cities such as Chicago. Turning to the Australian division, the consumer environment was more difficult in January and Goldman envisages little prospect of this changing in the near term with unemployment still rising.
In Australia, JP Morgan observes theme parks should benefit as a falling Australian dollar increases inbound tourism. Still, the broker questions whether the stock can maintain its growth multiples when one of its historical drivers of growth – health clubs – has declined suddenly. The broker believes it will be important to note if the stock maintains its status as growth-priced stock, as opposed to one previously priced on yield. Longer term, there is opportunity to grow the penetration rate of gyms. There has been a large increase in supply recently and JP Morgan has anecdotes of many 24-hour franchise clubs being in distress, so there may be opportunity for consolidation in the market.
The market appears to be unwilling to look through the uncertainties surrounding health clubs and the risk of a slowing in the Texas economy impacting on Main Event, in UBS' view. The churn in the flexible membership of the health clubs was significant and the broker considers the coming months will be crucial in order to demonstrate a turnaround and success with the new strategy, as well as sustained improvement in other segments such as bowling. UBS suspects the impact of lower oil prices in Texas will be more benign than previous recessions but remains cautious around momentum at Main Event, given the difficult in quantifying the incremental impact of any margin slowdown.
Morgans is relieved that Main Event shows no signs of slowing markedly, as it is the company's only driver of growth currently. The broker welcomes the about turn in management's strategy, as it previously went to great lengths to emphasise its differentiation from the 24/7 gym models. Costs appear to be the only downside in adopting the convenience offering. The broker suspects the mooted staffing changes will have to be finely tuned, as the gyms could risk losing existing members if service levels are affected. Either way, such a significant change in strategy, despite being sensible, requires runs on the board to instill confidence.
The WA Fitness First acquisition is also tracking behind target while cost synergies are ahead. Membership trends are a concern for Morgans as these were a key selling point at the time of the acquisition and the lead indicator of future earnings performance. In terms of theme parks, the broker believes the flat revenue in January was a credible result given wet weather in the company's major Gold Coast region during the month.
While Ardent Leisure plans to progressively convert its Goodlife chain to position it as the only large format gym chain with 24-hour access, Deutsche Bank fears the rising risks in transforming a business model. The broker materially downgrades near-term earnings forecasts and reduces its rating to Hold from Buy.
Ardent Leisure shows five Hold ratings on the FNArena database. The consensus target has fallen to $2.66 from $3.18 post the result and now suggests 12.4% upside to the last share price. The dividend yield on FY15 and FY16 forecasts is 5.7% and 6.1% respectively.
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