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Ardent Supporters Left Sodden

Australia | May 11 2017

This story features ARIADNE AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ARA

Bad weather during March and April has caused Ardent Leisure to downgrade forecasts for theme parks, signalling a loss in the division for FY17.

-Temporary setback to improving momentum at Dreamworld?
-Impact unclear on FY18 outlook
-Recent weakness raises concerns regarding Main Event strategy

 

By Eva Brocklehurst

Ardent Leisure ((AAD)) has blamed bad weather in its downgrade to theme park earnings, signalling a loss in operating earnings (EBITDA) of -$2-4m in FY17. During March and April theme park visits were down -36.7% and revenue down -38.9%.

Credit Suisse is not letting bad weather interfere with its outlook. The broker suspects the market acknowledges the short-term disconnect between earnings momentum and the underlying value of the Dreamworld asset, which was hit by a tragic accident late last year.

Improving momentum at Dreamworld at the start of 2017 was dealt a blow by Cyclone Debbie, and visits, which were improving, relapsed because of bad weather in March and April. Still, Credit Suisse does not expect further cyclone activity will damage theme parks and, hence, factors in an improvement in the second half run rate.

The broker also points out the accentuated impact at the earnings-per-share level. Dreamworld's position within the trust, as opposed to the corporate vehicle, means this particular asset does not pay tax and any change at the operating earnings level is directly reflected in net profit and earnings per share. Credit Suisse expects a recovery in the business and minimal impact on FY18 earnings.

Macquarie is sceptical regarding the the weakness attributed to the damage caused by Cyclone Debbie, even as the company signalled that customers deferred and cancelled travel plans to the region. The broker finds this inconsistent with feedback from Gold Coast hotel operators that reported strong trading in April. Macquarie previously forecast $6m in operating earnings for theme parks for FY17.

Citi believes the theme park industry on the Gold Coast is struggling generally, noting competitor Village Roadshow ((VRL)) also downgraded its outlook in April. The broker believes Village Roadshow has a clearer investment plan and a superior outlook for its theme parks relative to Ardent Leisure.

Visitor numbers and earnings will remain volatile for some time and the effect of the Dreamworld accident remains uncertain as to the longer term implications, in Deutsche Bank's opinion. While most of the downside has been factored in for the second half, the broker believes the more relevant driver of the outlook and valuation is the performance of Main Event. In this area, recent weakness has raised concerns about the company's strategy.

Main Event

The company's Main Event business remains the key driver of price and sentiment. Macquarie acknowledges it is too early to call two months as a step change for like-for-like sales but the improving momentum already witnessed is considered a positive sign.

Potential corporate activity is also expected to underpin the share price if Main Event remains weak, the broker highlights, following the substantial shareholding lodged by Ariadne ((ARA)) on March 29.

The appointment of new CEO, Simon Kelly, suggests to the broker more asset sales could be on the cards. Macquarie believes this is a critical point in time to consider selling Main Event or Dreamworld, as both businesses are materially underperforming, albeit for different reasons.

Citi needs to witness a sustained improvement in execution at Main Event before turning more positive on the stock. The broker considers Ardent Leisure expensive and retains a Sell recommendation. A takeover, or corporate activity led by new shareholder Ariadne, represents a key risk to this view, the broker points out.

FNArena's database shows one Buy (Credit Suisse), four Hold and two Sell ratings. The consensus target is $1.85, signalling -10.6% downside to the last share price. Targets range from $1.40 (Citi) to $2.25 (Credit Suisse).

See also, Ardent Leisure Slows Main Event Opening on April 11 2017.
 

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