Ardent Leisure Group (ASX: AAD) announced over the weekend that Dreamworld would remain closed for the near future, as the company engages specialists to both inspect the park and develop community recovery programs.
As quoted in Fairfax media, management stated that a decision on the park's reopening or a timeframe for such a reopening would not be taken this week. While the focus on rebuilding trust and making the reopening not appear driven by financial motive is a sound one, it does create uncertainty for shareholders.
How much will it cost?
It's difficult to break out specific numbers to identify the earnings of Dreamworld. In the absolute worst-case business scenario (excluding potential liability), assuming Dreamworld never attracts another customer and visitors likewise totally avoid SkyPoint and WhiteWater World, Ardent will lose $34 million in Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). This accounts for 23% of its 'segment' EBITDA earnings for 2015. With the sale of the Health Club segment, Theme Parks will now account for closer to 28% of group earnings in 2017.
Barring widespread safety breaches – which surely would have shown up before now – the chance of each of the three parks never attracting another customer is so minuscule in my opinion as to be not worth worrying about.
According to company brochures, Dreamworld attracted 1.8 million visitors in the 2015-2016 financial year compared to 0.6 million for SkyPoint, so it would be fair to assume that Dreamworld accounts for at least half of the company's Theme Park earnings. Given that WhiteWater World can be included as part of a Dreamworld pass, the earnings of that park will likely be hurt as well. It seems unlikely that visitors who avoid Dreamworld for safety reasons would feel comfortable visiting the adjacent WhiteWater World.
The bottom line?
It's difficult to evaluate the total cost to Ardent, especially since the parks incur ongoing costs even if they aren't open. Management have stated that staff continue to be paid while the park is closed – which means the impact of lost revenue plus fixed costs gets larger day by day. This doesn't include the largely un-quantifiable potential impact of lawsuits, fines, or customers lost due to safety fears and negative publicity. The public does have a short memory though, so factoring in a long-term impact to theme park visitor numbers would likely be unwise.
The debt burden
An important consideration will be Ardent's debt, with borrowing costs consuming a reasonable ~10% of the group's segment EBITDA last year. Excluding the Health Club segment, this rises to 12%, and it may rise again this year depending on the impact to the Theme Park segment.
Ardent carries $312 million in interest-bearing liabilities, or around 2x last year's EBITDA. With the sale of the Health Clubs, this slides up to 2.55 times. Depending on the final impact to Dreamworld, this debt to EBITDA ratio could slide higher. This is important because the company is limited to a debt to EBITDA ratio of 3.5x by its lenders and a significant increase in debt or reduction in earnings will be a concern.
Foolish takeaway
Fortunately, Ardent doesn't appear to be at risk of breaching its lending covenants this year. The recent proceeds from the Health Club sale will bolster the balance sheet, as will the sale of the Marinas division when that occurs. My above analysis also excludes ongoing growth in the Main Event business.
However, with the costs of repairs, hiring media and safety specialists, plus eventual lost earnings, I think Ardent's final report will – at first glance – look quite ugly this financial year.
