EUR 850.00 For Business Accounts Only

Morningstar | Ardent Leisure Requires Ardent Patience

We maintain our AUD 2.00 fair value estimate on Ardent Leisure, despite the underwhelming fiscal 2019 first-half result showing slower-than-expected progress in earnings recovery.

Theme Parks' underlying EBITDA loss of AUD 5 million was worse than the AUD 1 million loss suffered a year ago, and starkly contrasts with the 24% EBITDA growth achieved by competitor Village Roadshow's Gold Coast theme parks in the first half. The 4% drop in attendance was particularly disappointing. The coronial inquiry during the half may have adversely impacted. However, consumers' negative perception of Ardent's properties compared with the rival parks next door (which in fact put through price rises during the period) also contributed to the weak showing.

Main Event justified its status as the core growth engine for the group, delivering a 16% rise in first half underlying EBITDA to AUD 24 million. However, operating leverage was nowhere to be seen, as underlying EBITDA margin fell 80 basis points to 12.6%. The business is still in a transition phase, from a growth-at-all-cost model, to one that is still evolving. This is necessitating investments (branding, new attractions) and more judicious location scouting for new venues. All this is putting a brake on near-term margins, at a time when constant-centre revenue growth is anaemic, up just 0.7% in the first half and turning negative since.

However, the road to recovery was always bound to be arduous, especially for a no moat-rated company such as Ardent which has just undergone enormous changes (three of five divisions divested, financial and reputational hit from Dreamworld tragedy, complete board/personnel overhaul). This was reflected in the below-par first half result, but the new management team deserves time to reset and execute on its strategic and operational initiatives.

As such, we continue to see value in Ardent shares which are currently trading at a 26% discount to our intrinsic assessment.

In terms of our estimates, we have cut our fiscal 2019 to 2021 EBITDA forecasts by an average of 5%, reflecting our more subdued expectation of earnings recovery. However, our longer-term forecasts are largely unchanged. In five years' time, we continue to expect Main Event's EBITDA to reach around AUD 140 million, representing CAGR of 16%, driven by more disciplined new venue openings and improving margins. For theme parks, we continue to expect EBITDA to reach around AUD 30 million in five years' time, up from forecast AUD 2 million in fiscal 2019 but in line with the six-year historical average of AUD 32 million achieved before the Dreamworld tragedy hit from fiscal 2017.

In the critical Main Event division in the U.S., our forecasts currently assume an average of five new venues per year for the next five years, at the lower end of management's five to eight new openings a year. We estimate the division's EBITDA margin to reach 24.0% in five years' time, up from 18.7% in fiscal 2018 and in line with the group's medium-term aspiration of hitting 20%-plus. In the meantime, initiatives such as the national gift card program, new games and a focus on driving 'event' businesses (for example, birthday parties, corporate functions) are all designed to improve both sales and brand awareness. However, near-term growth in constant-centre revenue looks challenging, given tough prior-year comparisons and unfavourable weather in key markets.

As for the result details, first-half reported net loss came in at AUD 22 million, from an AUD 16 million loss a year ago, dragged down by a plethora of one-off items, especially relating to the Dreamworld tragedy and restructuring charges. No dividend was declared. The board is balancing reinvestment needs of the businesses against a balance sheet that ended the half with AUD 80 million in net debt, equating to 0.8 times our fiscal 2019 forecast EBITDA. The board plans to announce a capital management policy at the time of the fiscal 2019 full-year result. We currently DPS of AUD 0.02 as a final dividend for this fiscal year, rising to AUD 0.06 in fiscal 2020.