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Is Ardent Leisure Worth Considering?

Oct 01, 2015 | Team Kalkine
Is Ardent Leisure Worth Considering?

Delivered solid revenues, but profit declined:



Ardent Leisure Group (ASX: AAD) revenues surged by 19% year on year (yoy) to $594.6 million during the fiscal year of 2015, boosted by its family entertainment centers and health clubs growth. However, the group’s statutory profit plunged by 34.4% yoy to $32.1 million during the period, impacted by the rise in depreciation (including IFRS depreciation) and amortization of property, plant and equipment, and software by $12.4 million to $48.1 million in FY15. Moreover, the group also incurred an evaluation loss of $0.5 million on investment properties against the gain of $8.6 million on property, plant and equipment in prior corresponding period (pcp). Therefore, AAD’s core earnings per share fell by 10.3% yoy to 12.92 cents, while dividend per share declined by 3.8% yoy to 12.5 cents. As per the segment highlights, Main event improved its FY15 EBITDA share to 35% against 21% in FY14 EBITDA, making the segment the major business division of Ardent.

 
Ardent’s segment’s share (Source: Company reports)

Main Event delivered solid performance:

The segment generated 60.9% and 63.8% of revenue and EBITDA growth during FY15 against pcp. Constant center revenue rose by 8.3% yoy during the period driven by new core food menu, bar remodels and better amusement game contribution. But new centers delivered outstanding revenue growth of 402.8% yoy while EBITDA improved by 384.6% on a yoy basis. The group opened six new centers from last year July with two in Oklahoma, one in Illinois, one in Georgia and two in Texas. Moreover the segment’s average revenue of new centers is far better than the average revenue of the constant centers. AAD sold and leased back three centers in June and received over $32.0 million as well as a gain on sale of $5.3 million (equivalent to A$7.0 million). Moreover, AAD is developing five new sites which would open next year, while making negotiations for eight sites targeting to open in FY17 openings.
 

Main Event Portfolio & Development Sites (Source: Company reports)
 
New acquisitions and memberships drove Health Clubs performance:
Health Clubs overall revenues surged 8.7% yoy to $178.4 million in FY15, mainly boosted by new clubs or acquisitions division which surged 540.1% yoy to $26.8 million in FY15. On the other hand, Health Clubs EBITDA fell by 17.2% yoy in FY15 on the back of rising competition coming from 24/7 operators. Therefore, the group is making efforts to solve this concern. In the same spirit, it started focusing on 24/7 club conversions. Moreover, the June and July months of the year witnessed a solid membership growth supported by better member attrition across the division’s portfolio and better sales especially in 24/7 club conversions. The group’s shift of product strategy led to a better mix of higher value membership sales during the third and fourth quarters, which includes better percentages of 12 and 18 month programs. Ardent intends to convert more 30 clubs in FY16 leading to a total of 45 clubs with 24/7 operation by next fiscal year end. The division made a partnership with Emily Skye, who has six million followers to offer unique in-club and online Goodlife programs as well as e-commerce opportunities. Hypoxi Australia studios began subscription membership packages which would further underpin the division’s sales and total customer value. Hypoxi Australia studios would add six new studios in FY16
  

Theme Parks performance pressure:

Theme Parks revenues slightly fell by 0.6% yoy to $99.6 million in the fiscal 2015, impacted by the heavy rainfall as well as the effect of Cyclone Marcia. Accordingly, the division’s EBITDA fell by 2.4% yoy to $32 million during the period, while the EBITDA margin fell to 32.2% in FY15 against the 32.8% EBITDA margin in FY14.  On the other side, Ardent made solid marketing campaign and offered competitive pricing to offset this pressure and these efforts paid off with the May, June and July months generating 28% improvement in pass holders, especially from New Zealand and China. Ardent’s investment in online and digital marketing strategies also paid off wherein online sales delivered over 38% of total revenue. Moreover, Dreamworld started four new food and beverage outlets to enhance guest experience and was recognized as Queensland’s Best Major Tourist Attraction and Australia’s third most popular tourist attraction at the annual Australian Tourism Awards. Trip Advisor’s Travelers’ Choice Awards also recognized Dreamworld as best amusement park - South Pacific in 2015. Management believes that Dreamworld is well positioned to generate growth from new billion dollar Coomera Town Centre which is estimated to start by Dec 2017. Moreover the falling Australian dollar is anticipated to improve international visitation to the Gold Coast coupled with twice weekly direct Jetstar flights between the Gold Coast and China.


Theme Parks FY15 performance (Source: Company reports)
 
Stock Performance:

Ardent Leisure shares surged over 24.4% (as of Sep 29) in the last three months even though the group delivered a modest FY15 performance. Investors remain upbeat on the group, given the new management (with Deborah Thomas appointed as new CEO) efforts to focus on 24/7 health club conversions, emphasis on US markets. Moreover, the falling Australian dollar against the US dollar would also underpin its business growth. We also like the stable earnings from Theme Park, Bowling, Marinas, etc. The Company is also putting efforts for its international footprint expansion; and as a small step, it is looking for growth opportunities in China and Europe for its gym and entertainment businesses. Although, there seems to be little softness in consumer confidence but support from low interest rates is favorable for discretionary spending. Considering the aforementioned and AAD’s decent dividend yield of over 4.6%, we remain bullish on this leisure based firm at the current price of $2.74.


AAD Daily Chart (Source: Thomson Reuters)

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