EUR 850.00 For Business Accounts Only

Morningstar | Ardent Patience Required for Closing of Discount to Intrinsic Assessment

Securities in Ardent Leisure are trading at a 21% discount to our AUD 2.00 fair value estimate, even underperforming the struggling S&P/ASX 200 Index by 7% since the end of August 2018. However, we remain comfortable with our intrinsic assessment and believe a decent margin of safety has emerged.

The tepid organic EBITDA growth for Main Event (just 4% on a normalised basis in fiscal 2018) is hardly inspiring, especially for a business that now accounts for over 80% of group earnings (before corporate costs) and is trumpeted as the growth engine for no-moat-rated Ardent in the long term. But management is playing the long game to fulfil this potential. Gaining greater insight into customer preferences and improving overall experience in the venues are being prioritised over "big bang" new venue rollout targets. This is a sensible way to rectify Main Event's low brand awareness which is at half the level of key competitors in the U.S. "eat-a-tainment" space. We believe a "word-of-mouth" method to improve this via product/venue refinements, augmented by judicious marketing initiatives, is better than a wanton (and financially prohibitive) new store rollout strategy to achieve the same goal.

Indiscernible recovery in theme parks is also frustrating investors, as losses continue in the wake of October 2016 Dreamworld tragedy. Further, the pace of recovery is difficult to predict and there may still be remnant fallout from the current coronial inquest into the incident. However, we remain confident of a turnaround, with key metrics showing improvements (June-half 2018 visitations up 13% year-on-year, per-capita spend also edging up). We see no reason to change our expectation for theme parks EBITDA to recover from a normalised EBITDA loss of AUD 8 million in fiscal 2018 to AUD 32 million (at an EBITDA margin of 30%) in five years' time--broadly in line with the division's six-year historical average earnings and margins before the Dreamworld tragedy.

We acknowledge closing of the discount gap between Ardent's security price and our AUD 2.00 fair value estimate will require patience. The U.S. family food and entertainment market is a competitive one, while negative consumer sentiment on Dreamworld will linger for some time. Investors should also be reminded that Ardent's senior management team has only recently been overhauled, with Chris Morris taking control as Main Event CEO in March 2018 and the theme parks CEO John Osborne commencing his duties on Nov. 5, 2018. This follows the rejuvenation of the board, led by Gary Weiss who assumed the Chairmanship in September 2017, and joined by Randy Garfield and Brad Richmond.

These executives should be afforded time to execute on the turnaround program. They certainly have necessary credentials to do so, with deep experience spanning leisure, entertainment and restaurant industries. Indeed, their influence and insight could well explain Ardent's about-face on Main Event's rollout strategy, one whose ambition has been dialled down from the previous management regime's aspiration target of 200 venues in a few years' time (currently just 41, and we forecast to grow to 65 by the end of fiscal 2023), to one that will hinge on quality of the new venue site location and the competitive dynamics in its catchment area. After all, what would be the point of opening a new venue in a location saturated with competition and/or is devoid of traffic density, just so it can add another venue to the network?

Importantly, the refreshed senior management team is backed by a solid balance sheet which ended fiscal 2018 with net debt of just AUD 11 million, equating to net debt/normalised EBITDA of just 0.3 times. There is ample capacity, therefore, to fund Main Event's more measured growth strategy in the U.S., as well as invest to revitalise Ardent's theme park properties (especially Dreamworld).