Dreamworld to reopen: Why I think Ardent Leisure Group shares are a sell

After the tragedy at Ardent Leisure Group’s (ASX: AAD) Dreamworld theme park a month ago, the company today announced a timeline for the reopening of its WhiteWater World and Dreamworld attractions.

Both theme parks will re-open to guests from 10 December 2016, with WhiteWater World fully functioning while Dreamworld will progressively re-open as each ride is approved by safety inspectors.

Last week, Ardent published the results of the initial safety review which revealed a number of minor procedural concerns regarding its rides, but nothing relating to guest safety.

Ardent also gave an outline of the approximate quantum of costs it will incur as a result of the closure and review:

  • Operating costs of between $4 million and $4.2 million
  • Approximately $1.6 million in one-off costs associated with the tragedy (net of expected insurance recoveries)
  • No revenue from the parks during the ~6 weeks they were closed (for comparison they earned $7.6 million revenue in November 2015)

Ardent has around 30% margins at its segment Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) line, which is a pre-tax measure. Still, a ballpark estimate of the lost revenue suggests that Ardent’s profits might be a couple of million lower, before the impact of the operating costs.

At above $2 per share, I think Ardent is expensive. Even excluding the impact of the Dreamworld tragedy, investors are paying 25 times earnings for a company that just sold businesses that were generating a quarter of its annual profits. It’s ploughing those funds back into its Main Event business, which seems like a good opportunity.

Yet investors are paying a premium for an uncertain outcome  – the earnings on businesses that haven’t been built yet. There’s all sorts of problems that could crop up with a rapid roll-out of the Main Event business.

Ardent might struggle to find enough capable managers for its locations. Competition might be stronger in the more prosperous or populous states, or perhaps Main Event’s appeal might be lesser. There could also be the usual issues with construction and fit-out running behind schedule and suchlike. Ardent also has the cost of keeping its Main Event centres fresh and up to date.

It’s not that I think Main Event is a bad opportunity, it’s that I think investors are paying too high a price for an outcome that’s too uncertain. I think investors will get a better risk-reward trade off by waiting patiently; either with a lower price, or with a higher price combined with more proof of success.

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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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