The Ardent Leisure Group (ASX: AAD) share price fell 1% to $2.01 this morning, after the company released an update for the full year to 30 June 2017. While the company's audited full-year results are not expected to be released until later in the month, Ardent provided a business update on revenues and earnings:
(Figures are preliminary and not audited)
- Revenue of $586 million, down 15% from $688 million in prior year
- Core earnings before interest, tax, depreciation and amortisation (EBITDA) of $76 million, slightly ahead of guidance for $73 million to $75 million
- Main Event revenues jumped 30% and EBITDA rose 6%, margins declined from 24.9% to 20.3%
- Bowling experienced a 2% decline in revenue and 17% decline in EBITDA
- Theme parks revenue fell 34% and segment was loss-making. Expected to take 2 years to recover.
So what?
Main Event centre performance was mixed, with constant-centre sales falling 2.6%, which management attributed to their conscious cannibalisation strategy of building local 'clusters' of centres. Competition, especially at older centres was also blamed for the decline, and a similar theme was found in the Bowling segment also. Management is focusing on refurbishments and other improvements such as menu revitalisations to lift performance here.
The theme parks, of course, struggled, although it was encouraging to see "the early signs of an improvement in demand with cumulative season pass sales now down 10-15% on pcp and on a positive trend." This suggests a general improvement in business conditions and management expects to return to normal trading conditions in two years or so.
Now what?
My view is that Ardent is over-priced, or at least mis-priced given some of the uncertainty surrounding it. The company has an enterprise value to core EBITDA (EV/EBITDA) ratio of almost 14x, which is lofty considering that comparable consumer businesses can be had for around 8x. If you assume that theme park earnings recover to last year's levels, the ratio falls to 9x. However, this ratio overlooks the spending on refurbishment that appears necessary given the weak sales results in the bowling and Main Event divisions.
It's also not clear if the Main Event issues are temporary teething problems, or if this business will simply fail to be as profitable as it has been in the past, given increased competition and so on. Main Event is a promising opportunity, and likely a winner if it rolls out more widely. Still, there are a lot of unknowns and in my opinion it is important not to overpay. That's why I continue to avoid Ardent at today's prices.
