I don't think Ardent Leisure Group (ASX: AAD) is a buy at today's share price. I think that, given the issues the company faces, it is overpriced and its future too uncertain to make it a buy today.
These are my primary issues:
- Price; Ardent is priced at 13x its forecast earnings before interest, tax, depreciation and amortisation (EBITDA) of $75 million, which is expensive relative to other consumer businesses
- Same store sales decline; the continuous decline in same-store sales at Main Event franchises. There could be multiple reasons for this but management's 'conscious cannibalisation' claims don't sit well with me, given that all of its outlets appear to be 20km or more away from each other, in densely populated cities (Houston, Dallas Fort Worth, etc.)
In a nutshell, my view is that the company is overpriced and its soon to be primary business, Main Event Entertainment, is not all it's cracked up to be (their menu looks delicious, though). I believe today's price factors in at least 2-3 years of growth already, which is a lot in the highly competitive consumer entertainment space.
I could be wrong, and if I was it would be for a combination of these reasons:
- New management
- Strong balance sheet following asset sales
- Theme parks returning to form
- The economics of Main Event with 30% EBITDA returns in first year out could certainly lead to a snowball effect over the next 5-10 years
- Investors agitating for change and 'unlocking' of value via redevelopment of existing sites etc.
In my view, all investors need to consider both sides of the story and weigh up which view of the company sounds more likely, and then consider their investment time-frame. Over the next 2-3 years I'm not expecting Ardent to be a standout, but if its Main Event business does meet expectations (and this is the part I'm not sold on), the company could be a winner over the next 10.
Speaking for myself, I'll be waiting for a better price or greater clarity on the success of Main Event before making a purchase.
