Ardent Leisure (AAD)

Fat Prophets

Monday 3rd March 2014

Ardent Leisure has once again delivered a stellar set of numbers for the December-half. Revenues increased 14 per cent year on year to $251 million, leading to a 13 per cent lift in core earnings to $34 million.

The operating momentum in the US Main Event (earnings up 32 per cent) and the bulked-up Health Clubs division (earnings up 19 per cent) continue to impress, while we were particularly encouraged by the turnaround in the Bowling division (earnings up 9 per cent).

The leisure operator also generated free cash of $14 million in the first half, a material turnaround from the $1 million deficit a year ago, on the back of higher earnings and reduced capital expenditures.

Outlook
We continue to be impressed by the operating momentum in most of Ardent Leisure’s diversified operations.

The strong growth coming through in the Main Event business (currently 13 centres in the US) is particularly strong, and will be further augmented by six new family entertainment venues which are likely to be up and running by June of 2015. The outlook for this US division will also benefit from continuing improvement in the world’s largest economy, as well as the appreciation of the Greenback, as the Main Event earnings are 100 percent unhedged.

Trading in January indicates that operating momentum is also healthy in the Health Clubs and the Theme Parks division, while the earnings turnaround in the Bowling division is especially noteworthy.

At the group level, management continues to extract operational and process efficiencies through judicious investments and stringent focus. Meanwhile, Ardent Leisure’s financial position remains robust, with comfortable debt metrics and over $100 million of unused debt facility to drive future growth plans.

Price
The stock has enjoyed a strong ride in recent times, rising 25 per cent and 54 per cent over the past 6 and 12 months, respectively. The strong performance reflects Ardent Leisure’s solid operating momentum and investors’ increasing recognition of the resilience of, and growth prospects for, its operating properties.

Worth Buying?
Ardent Leisure boasts a high-quality diversified portfolio of entertainment assets, operated by a strong management team with a demonstrable track record of cost control and growth generation. These were once again abundantly on display in the recent interim financial results.
Having said that, the stellar performance on the bourse has seen the shares re-rate to now 17 times consensus fiscal 2014 earnings estimates and 15 times the year after. At these levels, we believe it is prudent for those without exposure to wait for a pull back in price before buying into shares of this quality operator of affordable consumer leisure destinations.

Greg Smith is the Head of Research at Fat Prophets.
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