Ardent Leisure Group (ASX: AAD) has bounced more than 7% in morning trade after announcing unaudited full year results and the planned acquisition of Fitness First WA for $32.5 million. The acquisition is valued at 5.27 times the WA gyms' forecast EBITDA during the first full 12 months under Ardent's management.
Ardent also operates Australian theme parks, marinas, bowling centres and North American entertainment complexes. Among its assets are the Goodlife health clubs, Dreamworld theme park and Kingpin bowling centres.
Unaudited statutory earnings for FY 2014 were also announced up 37.6% to $49.6 million on revenue up 11.3% to $499.7 million. The group attributed the strong earnings growth to the performance of its Main Event entertainment complexes in North America and Goodlife health clubs across Australia.
The group is issuing $50 million of equity to institutional shareholders to fund the Fitness First WA acquisition and expansion of its Main Event entertainment complexes. Indeed for growth-oriented investors the main event really is the Main Event complexes, with Ardent aiming to open 21 new complexes by FY 2017, to take the total operating to 35. The complexes saw EBIDTA up 26.6% year on year, far ahead of the health clubs business.
The Goodlife health clubs are a growing brand and and are a significant profit driver, while now contributing around one-third of the group's revenues. Ardent has been expanding into the gym space long before the Fitness First WA acquisition and will be relying upon a general take-up in gym memberships, although that seems a reasonable prospect in an increasingly health conscious culture.
However, health club businesses are notoriously competitive, with low barriers to entry presenting serious competitive risks. Indeed, to compete on a low-cost basis all you really need is the floor space, gym equipment, and large amounts of mirrors to appeal to the vanity of your members.
Ardent will hope that by aggressively buying up clubs it can develop a competitive advantage through a network effect that attracts members due to the passport benefits and best facilities.
It may be successful and is priced for growth on a price earnings of 18.75 based on expected earnings per share of 14.4 cents for FY 2014. The dividend remains a big drawcard with a predicted payout of 13 cents per share in FY 2014 putting it on a 4.8% yield.
Shares were up 19 cents to $2.70 in morning trade.
