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Morningstar | Insiders and Outsiders' Divergent Faith in Ardent Leisure

Since unveiling its fiscal 2019 first-half result on Feb. 22, 2019, shares in Ardent Leisure have slumped 8%, underperforming the market by 12%. At one stage in early April, they were down as much as 23%. Investor frustration with the progress of the theme park recovery and Main Event’s uncertain growth trajectory are palpable. However, we maintain our faith and the AUD 2.00 fair value estimate, with the stock currently trading at a 34% discount to this intrinsic assessment.

Restoration of Ardent's full earnings power was always going to be a long, arduous process. Consumers remain resistant to visit the group's theme parks, despite it being two-and-a-half years since the Dreamworld tragedy. However, management is maximising revenue from those patrons who are returning, with 16% growth in first-half yield driving 9% like-for-like revenue growth, despite 6% lower attendance. The near-term outlook for Main Event same-venue sales and margins is challenging, due to tougher prior-year comparisons and necessary reinvestment (new attractions, promotions). But foundations are being established to reposition the business with more analytic/insight-driven initiatives and more judicious location-scouting for new venues.

Critically, faith is being shown by company insiders. In the month of April, substantial shareholder Ariadne (associated with Chairman Gary Weiss) lifted its stake in the no-moat-rated Ardent to 12.3% from 10.9%. Director David Haslingden more than doubled his shareholding to 331,673, while fellow director Brad Richmond purchased 261,550 shares to increase his holding to 310,000. While perhaps not earth-shattering sums, they illustrate the confidence these insiders have in the direction that Ardent is heading. It is now up to the revamped senior management at both theme parks (led by John Osborne, appointed November 2018) and Main Event (led by Chris Morris, appointed March 2018) to execute. We believe they should be given the time to do so.

We have pared back our EBITDA estimates for the next three years by an average of 22%. This reflects the likelihood of a more prolonged earnings ramp-up, especially in Main Event where we expect near-term reinvestment, branding and general refinement under new management to cap margin improvement. Beyond the next three years, our group estimates are largely unchanged.

On a five-year horizon, we still expect Main Event to achieve EBITDA CAGR of 15%, reaching AUD 136 million in fiscal 2023 on an EBITDA margin of 23.0% (from 18.7% in fiscal 2018), with five new venues opening on average each year. This compares with management's long-term margin projection of 20%-plus with a target of opening five to eight new venues per year. The performance of recent new venues certainly provides comfort that management's revamped real estate strategy is working. For instance, the two most recent new venues--open for at least 12 months--are generating returns on investment of around 40%.

As for theme parks, we forecast EBITDA to hit AUD 31 million by fiscal 2023. This may sound like a pipe dream given the AUD 8 million loss suffered in fiscal 2018 and a minuscule AUD 2 million EBITDA we forecast for fiscal 2019. However, our estimated earnings in five years' time is merely in line with the annual average EBITDA of AUD 32 million generated by the theme parks in the six years before the Dreamworld tragedy in fiscal 2017. In fact, our fiscal 2023 EBITDA margin of 30.0% for the division is below the 31.9% six-year average achieved before the Dreamworld tragedy, showing some baked-in conservatism.

Finally, there is balance sheet capacity for management to execute the turnaround strategy, having finalised a debt facility in early April 2019 to support Main Event's growth aspirations. As it currently stands, Ardent has over AUD 80 million of cash at the group level, while Main Event has access to USD 100 million in undrawn facilities.