|Summary: Ardent Leisure Group operates theme parks, health clubs, bowling alleys and family entertainment centres, and has delivered a total shareholder return exceeding 40% over the past 12 months. However, it appears as though the market is more than fully pricing in its main attributes at current levels.|
|Key take-out: The market re-rating of yield has almost run its course. However, with a comparatively sound yield of 8.3% on offer, coupled with marginal longer term growth opportunities, AAD remains a solid hold for the model income portfolio.|
|Key beneficiaries: General investors. Category: Income.|
Ardent Leisure Group (ASX: AAD) is a specialist operator of leisure and entertainment assets across Australia, New Zealand and the United States. Throughout Australasia, AAD operates health clubs, AMF and Kingpin bowling centres, the Dreamworld and White Water World theme parks, SkyPoint and d’Albora Marinas. The group also operates the Main Event family entertainment centres in the United States.
In terms of structure, AAD is a stapled security that comprises one unit in Ardent Leisure Trust, stapled to one share in Ardent Leisure Limited. The company leases assets from the trust and carries on operational business activities. As such, I view AAD more so as an income-producing property group with marginal capital growth potential.
AAD’s recent results highlighted the ongoing diversification of its earnings base away from what was once a heavy reliance on theme parks.
Given AAD’s recent purchase of additional health clubs in Australia and ongoing growth in the US-based Main Event business, I expect this trend will continue in FY2013 and beyond.
Financials and Distributions
Gearing has remained in a relatively tight band for some time. The net debt-to-equity ratio has averaged about 40% over the past 10 years, and as at 31 December 2012 stood at 39.7%. Groups of this type typically utilise the gearing ratio to measure indebtedness, which currently stands at about 29%. I view this as a moderate level of gearing appropriate for the business model.
Management recently commented that they expect gearing will remain at the lower end of their targeted range of 30 to 35%. In my view, a red flag would be raised if this ratio was to approach (or exceed) AAD’s gearing covenant of 40%.
Although the reported profit and normalised return on equity performance over the previous decade has been quite mediocre, there are some mitigating factors. Reported profit figures, over the past five years particularly, have been adversely impacted by property devaluations and meaningful depreciation and amortisation expenses. Among other things, this reflects both a more subdued operating environment and a tougher time for the property sector. As always, I closely scrutinise the operating cash flow generated by the group, which has been consistently sound over the past five years (highlighted below).
Another point of note is the consistency of new capital being raised over time. AAD has employed a distribution reinvestment plan since listing which, when coupled with various security purchase plans, has been used primarily to acquire further assets. Thus AAD may not be one for equity purists, who generally treasure self-funded growth.
As is the case with most property backed groups, AAD is more likely to attract the interest of income focused investors. The group has developed a strong track record of paying out distributions on a consistent basis, having delivered bi-annual distributions to owners since listing in 1998. This has in turn driven sound total returns, reflected by an annual total shareholder return of 17.5% over the past decade.
Over the last year at Clime we have discussed the market’s push towards yield in what has been a low growth environment since the advent of the GFC. In a comparative sense, this has been intensified by the historically low yields on long bonds (see below) and more recently, a diminishing return on term deposits.
Whilst the operational performance of AAD has been satisfactory of late, it is likely that the strong recent shareholder return performance has been an outcome of the “yield compression” focus gripping the market. Although this surge within the market may continue in the near term, paying prices well above value purely to secure yield may ultimately deliver underwhelming longer-term total returns.
At an operational level, AAD is exposed to several factors that may impact performance such as consumer sentiment, interest rates (somewhat inter-related), employment trends in Australia and, to a lesser extent, Texas, the weather, and the historically strong Australian dollar.
Consumer sentiment has been notably weak for an extended period of time in all of AAD’s major markets. A rebound in consumer sentiment, likely to go hand-in-hand with a low interest rates, would be a strong positive for the operational performance of AAD. This would also reduce the interest burden for the group.
Employment levels in AAD’s key markets are mildly supportive at current levels. The risk of a weakening employment trend in Australia is somewhat mitigated by the lower-cost entertainment AAD offers. Whilst some families may defer the big holiday offshore, they may still ‘invest’ in a cheaper domestic alternative.
More recently, AAD has been focusing its expansion plans on health clubs and the ongoing rollout of the Main Event family entertainment centres in Texas. This makes sense from an investment viewpoint given the comparative returns being generated by each business unit, noted below. AAD is also a beneficiary of the lower cost of debt currently available in the US (currently averaging 1.91% for AAD).
The high Australian dollar impacts the operations of AAD through two main dynamics. The first is the increased propensity of Australian families to travel offshore instead of to the Gold Coast. The repatriation of US earnings is also negatively impacted through an appreciating $A. The flipside of this situation is that AAD would benefit from a falling currency, turning mild headwinds into tailwinds.
In my view, AAD has the capacity to grow incrementally over the long term and to offer a sound distribution yield to investors along the way – albeit with some risks. However, it appears as though the market is more than fully pricing in each of these two attributes at current levels.
So while a purchase at today’s market price would present an investor with a comparatively sound yield marginally above 8%, I remain cautious about the entry price.
John Abernethy is the Chief Investment Officer of Clime Investment Management.
Clime & Eureka have joined forces to offer a first-rate stock valuation & research solution. Gain a sneak peak with MyClime and identify companies with attractive dividends and yield. (Click here).
Returns since Inception (April 24, 2012): 22.28%
Start Value: $118,757.19
Dividends accrued since December 31, 2012: $1,594.92
Clime Income Portfolio - Prices as at close on 21st March 2013
|Hybrids/Pseudo Debt Securities|
|Company||Current Price||Margin over BBSW||Running Yield||Franking|
|High Yielding Equities|