Ardent Leisure Slows Main Event Opening

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Theme park and entertainment business Ardent Leisure will slow down the opening of new Main Event centres as it focuses on refurbishing legacy centres.

-Company cites need to execute better on existing Main Event sites
-Same centre revenue at Main Event still negative in March quarter
-Theme parks not expected to grow significantly in the near term
 

By Eva Brocklehurst

Theme park and entertainment business Ardent Leisure ((AAD)) revealed an improving trend in the March quarter at its key Main Event business but signals it will slow down the opening up of new centres as it focuses on refurbishing legacy centres.

Like-for-like revenue at Main Event was down -2.5% in the quarter but brokers note a sequential improvement, with March actually producing growth. As a result of a sustained period of no growth the company has decided to reduce the number of centres it is rolling out, citing a need to execute better at existing sites. The target for FY18 is reduced to eight from 11.

Refurbishing the remaining eight of nine legacy centres will consume a significant amount of time but is also expected to deliver a better performance. Meanwhile, theme parks recorded a decline in revenue of -34.3% in March, worse than the -33.6% decline in February, as heavy rainfall occurred during this period. Bowling revenue fell by -0.8%.

Main Event

Weakness in the underlying Main Event business was attributed to competitive pressures and a challenging consumer discretionary environment in Texas, which represents 14 of the 19 centres. Highway construction also affected access to two of the centres.

Despite a lower roll-out in FY18, management expects new centre openings to re-accelerate in FY19 and maintains a long-term target of 200 centres, with the pace to be determined by the ongoing review of the business performance. Of the remaining nine legacy centres, three will be refurbished in the in the June quarter of FY17 and five in FY18.

Morgans believes Main Event is capable of returning to growth, especially after the refurbishment of the nine legacy centres. The downgrade to the rolling out of centres signals that management was stretched, in the broker's opinion.

The main risks to the broker's target are competitive pressures in all businesses, as well as a slower-than-expected roll-out and/or lower returns from new Main Event centres. There is also the liability and further valuation impact resulting from the Dreamworld accident.

Citi welcomes the decision to slow down the roll-out of new centres, having previously believed the plans were too ambitious. The decision may weigh upon estimates in the short term but the analysts are of the view that the growth pace is likely to be more sustainable now.

UBS takes a more conservative approach to the opening of new centres and does not expect Main Event to reach the 200 target until around FY32. The broker does not envisage free cash flow until FY27. Rating is downgraded to Sell from Neutral.

The broker finds no reason why the company cannot reach 200 centres over the long-term but, given the focus on refurbishments in the near term and the slower roll-out, the competitive landscape may be significantly changed by the time the company is expected to produce free cash flow.

New food and beverage offerings and a TV marketing campaign may help return constant Main Event revenue to positive levels, the broker acknowledges, but suggests that previous target speed of rolling out centres at 30-40% per annum is unlikely to extend beyond FY17-18.

Macquarie observes sales are moving in the right direction, with the solid March growth driven by initiatives such as changing advertising to TV from radio. The broker accepts it is too early to call two months a step-change for Main Event sales but considers the improving momentum in February and March a positive sign.

Moreover, Macquarie suggests potential corporate activity could help underpin the share price if Main Event remains weak. This follows the substantial shareholding lodged by Ariadne ((ARA)) and associates on March 29. Currently, Ariadne has just under 6% voting power in Ardent Leisure.

While the slower roll-out has predictable implications for forecasts, Credit Suisse believes there are benefits to management resourcing and the probability of success is increased.

While competition in US casual dining is fierce, the broker welcomes the material improvement in like-for-like sales at Main Event and asserts that market confidence in execution arguably increases with a more measured strategy. The broker continues to forecast average revenue per centre growth of 1.0% across FY18-19, although remains cautious in the light of recent volatility.

Theme Parks

UBS believes the mature bowling/theme parks division's combined operating earnings (EBITDA) are unlikely to grow over the period of FY16-20, given the competitive pressures in each format and the tragic event at Dreamworld. The broker does not include any potential fines or compensation payments in forecasts.

Credit Suisse estimates that theme park earnings are around 45% below that of their pre-accident peak in FY16 and suggests that a protracted recovery profile could be conservative, if history is any guide.

The broker makes some minor changes to near-term estimates for Dreamworld, largely because of the impact of the well-publicised adverse weather in Queensland, as the area experienced a 160% increase in total rainfall for the quarter.

Similarly, some minor changes to assumptions for the bowling division are made, based on the short-term closure and renovation of the Strathfield site. The sale of the marinas division is on track to be completed by June 30.

FNArena's database has one Buy (Credit Suisse), four Hold and two Sell ratings. The consensus target is $1.88, signalling -4.3% downside to the last share price.
 

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