Ardent Leisure is a specialist operator of leisure and entertainment assets in Australia and the US. It runs theme parks at the Gold Coast (Dreamworld, WhiteWater World), bowling alleys (AMF, Kingpin), gyms (Goodlife health clubs), marinas (d'Albora Marinas) and family entertainment centres in the US (Main Event USA).
The company provided a relatively positive trading update recently for the March quarter. The family entertainment (Main Event) business in the US was the star performer, with earnings before interest, taxes, depreciation and amortisation (EBITDA) for the entire nine months to March 2013 surging 38 per cent year on year, boosted by contributions from new venues.
Similarly, the health club division is trading strongly, with EBITDA for the nine months up 43 per cent year on year, again aided by contributions from new clubs. Revenues from the theme parks division are growing in the mid-single-digit percentage.
However, earnings are being impacted by higher DreamWorks and Big Brother licence fees, as well as higher electricity costs: EBITDA for the nine months to March was down about 1 per cent year on year.
Also, the bowling division has struggled.
Ardent Leisure ticks many boxes in terms of our top-down thematic view. First, we are positive on the economic and property-market recovery in Queensland, particularly in the south-east region.
With more than 40 per cent of the group's earnings coming from the state, we believe Ardent Leisure provides an ideal exposure to this theme. Further, the weakening Australian dollar is a material tailwind for inbound tourism.
Second, we are positive on the US economic recovery. While the pace of improvement has been rocky, the upward trajectory is clear. This is likely to underpin the continued growth of the family entertainment (Main Event) business in the US, which accounts for more than 20 per cent of the group's earnings.
Finally, the declining interest-rate outlook in Australia and the likely flow-on impact on consumer sentiment are likely to benefit the company's entire suite of affordable leisure offerings.
Ardent Leisure's stock price has enjoyed a stellar ride on the bourse, rising 20 per cent and 34 per cent during the past six and 12 months, respectively. The strong performance has been driven by the accretive $61 million acquisition of 10 Fenix Fitness clubs in September last year, as well as the company's solid overall trading performance since.
We are attracted by Ardent Leisure's leverage to many of the top-down themes we are positive on. The stock is now trading at 13 times consensus fiscal 2013 earnings estimates and 12 times the year after. The stock is also yielding more than 7 per cent at current prices, while its balance sheet gearing remains comfortable at 32 per cent.
We believe the stock is worth buying at current price levels.
Read Brian Han's Hot Stock column every week at smh.com.au /money.
Brian Han is Senior Research Analyst at Fat Prophets sharemarket research. To receive a recent Fat Prophets Report, call 1300 881 177 or email email@example.com.
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