Theme park and leisure facilities operator Ardent Leisure Group (ASX: AAD) collapsed to a near one-year low as its first half result is suggesting a downgrade to full year consensus earnings.
I hope you were hanging on tight on this white-knuckle ride with the stock plunging over 13% to $2.40 in lunch time trade.
While operational revenue increased 14.1% to $285.9 million, core earnings per share (EPS) dropped 9.7% to 7.5 cents.
Unless there’s a significant improvement in operating conditions in the current half, Ardent Leisure is at risk of missing earnings expectation for 2014-15.
First half core earnings (which excludes non-operational items like derivatives, property revaluation, pre-opening expenses, etc.) typically constitutes around 58% of full year profit.
At the current run rate, core EPS is likely to come in at just under 13 cents a share compared to consensus forecast of 15.7 cents a share.
Dividends are also at risk of coming under expectations. Management declared a 7 cents interim distribution, up from last year’s 6.8 cents. But first half dividends are historically larger than the second half and analysts have penciled in a full year dividend of 14 cents.
One of the most alarming aspects of the result was the slide in profits from the group’s health club business. This division is the second largest earner for the group and contributed close to 30% of total earnings before interest, tax, depreciation and amortisation (EBITDA). Health clubs have also been one of the key growth drivers for Ardent Leisure in the past few years.
However, the growth has fast tapered off. Falling membership numbers and rising competitive pressures have forced EBITDA to fall 11% to $14.5 million for this division in the six months to end December 2014.
Management believes it can turn around the business by introducing more flexible membership schemes and converting its full service fitness centers, Goodlife, into 24 hour facilities.
On the upside, the group’s United States entertainment centres, Main Event, continue to grow strongly. This should help reassure nervous investors that the impact on the Texan economy from the falling oil price may not be as bad as some had originally expected.
The deterioration in its Gold Coast theme park business also seems to have been arrested with management noting that the division has returned to earnings growth since January this year.
Calling Ardent Leisure’s interim result “disappointing” is an understatement, but I believe the group still makes an ideal long-term core holding.
Ardent Leisure has a strong track record in delivering growth (outside of the latest result), quality assets and a yield that should stay comfortably above 5%.
Further, the falling Australian dollar and petrol prices will provide tailwinds for the group in 2015 as these will spur domestic tourism and encourage international travellers to visit our shores.
I’ll be waiting for the stock to fall closer to $2 to add to my holdings.
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Motley Fool contributor Brendon Lau owns shares in Ardent Leisure. Follow me on twitter https://twitter.com/brenlau