Ardent Leisure Group shares surge on giant US potential

Following on from last week’s dramatic rise, shares in Ardent Leisure Group (ASX: AAD) soared a further 14% today after the company released its full-year results.

Here’s why:

  • Revenues rose 16% to $664 million
  • Net Profit After Tax rose 32% to $42 million
  • ‘Core Earnings’ rose 11% to $62 million
  • Earnings Per Share rose 7% to 13.79 cents
  • Dividends Per Share flat at 12.5 cents per share
  • Marinas division and Health Clubs division to be sold
  • Outlook for growth in Main Event centre numbers, plus low-single-digit growth in existing centres

So What?

The strong rise in revenues and profit no doubt played a part but I suspect the market is also quite excited about the potential of the group’s Main Event family entertainment centres, which it has been steadily rolling out across the US. The reception in states outside of Texas has been positive and management has noted that funds from asset sales are likely to be redeployed into Main Event, which reportedly has a target market that could sustain up to 200 sites across the US.

Given that there were just 27 Main Event centres at the end of the year and that they are a high-margin investment opportunity, perhaps investors are right to get excited.

On the downside, profits this year were not as good as the headline result indicated thanks to a number of one-off events in the previous year, although the more appropriate ‘Core Earnings’ still grew a respectable 11%.

Now What?

Although Ardent shares are up today, the sale of the Marinas and Health Clubs divisions will leave an almost $40 million hole in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), which won’t be filled overnight. On the plus side the funds will be re-invested in businesses with much higher EBITDA margins than the Health Clubs, which were only half as profitable as the rest of the portfolio due to high competition and high customer expectations.

With Ardent’s dividend expected to remain flat at 12.5 cents in 2017 and funds being redeployed to Main Event centres over the next five years, investors are effectively wed to the success of this strategy. Fortunately there has been several years of successful trading of Main Event so far which greatly reduces the risks compared to if it was a new venture.

Ardent offers a strong dividend which appears stable, and trades at 21 times earnings, or 15 times ‘core earnings’. This does not appear demanding, if investors are aware of and patient enough to stick with the Main Event strategy over the next few years. Ardent carries moderate levels of debt, yet it has strong cash flows and a good growth opportunity and I am considering buying shares today.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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