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Ardent Leisure Slowly Turning Positive

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Ardent Leisure ((AAD)) sustained positive earnings momentum for both Main Event and theme parks in the first half and encouraging trends continue into 2018. So far, brokers welcome the early signs that management is achieving a turnaround.

Credit Suisse points out positive developments such as sales growth at Main Event, a new well-credentialled CEO and improving trends at Dreamworld, as well as a reduction in corporate costs that has been faster than forecast.

By the end of FY18 the company should be in a net cash position. The broker suspects the Main Event business has bottomed and the company is facing consecutive quarters of growth. Importantly, the situation is not getting worse.

Moreover, UBS notes the accounts in the first half were cleaner than at any time in recent memory, as the company reduced the number of recurring "one-offs".

Ord Minnett upgrades to Hold from Lighten, based on valuation. The broker can envisage why investors would be positive about the stock as, potentially, a high valuation can be constructed several years hence, assuming theme parks are restored to previous levels of profitability and Main Event is optimised and returns to growth.

Notwithstanding some necessary expenditure to revive Dreamworld, Credit Suisse observes the market structure is improving. The broker maintains an Outperform rating but notes volatility around news flow.

The stock is not considered in value territory but, given the US macro environment is improving and this has, historically at least, correlated with the performance of Main Event, the outlook should be brighter.

Citi suggests the company has demonstrated an ability to extract significant value when divesting assets, as the bowling division was recently sold at 49% above valuation.

The strong sale price for bowling is also a positive outcome, in Deutsche Bank's view. Top-line growth in Main Event is essential for the business to turn around, the broker asserts, while the theme park recovery may take more time.

Theme Parks

Theme Park revenue is up 56% from December to February. The company now expects FY18 attendance levels at theme parks to be 74% of FY16 levels, versus prior assumptions of 84%. The company's confirmation of a slower turnaround are in line with Citi's suspicion that previous calls for a two-year turnaround were optimistic.

The company has indicated it intends to invest in its theme parks, noting improved attendance is a function of all rides now being operational after longer-than-usual maintenance programs.

Despite plans to increase investment in theme parks, given Ardent Leisure has historically under invested in comparison with rival Village Roadshow ((VRL)), the company has indicated it does not want to enter a capital expenditure war.

Citi expects discounting at the Gold Coast theme parks to come to an end as Village Roadshow has indicated that there will be no further discounts and its pricing structure is rigid.

UBS suspects that, unless Dreamworld achieves substantial ticket price increases, a meaningful contribution to earnings from theme parks is not likely until FY20. Moreover, the sales process for surplus land is in early stages and unlikely to be realised before 2020.

Ardent Leisure has indicated an interest in targeting inbound tourists and recovering business. The Commonwealth Games could provide an opportunity, but Citi envisages risks from potentially disappointing season pass sales.

Main Event

Strong sales growth at Main Event appears to have been driven by less discounting while brokers expect new centres in FY18 should outperform.

The company has appointed a new CEO of Main Event, Chris Morris. Brokers believe he has the right experience in rolling out dining brands and turning around businesses, as well as working on entertainment restaurant formats.

Main Event is planning three openings in the second half and the company expects the FY18 cohort to perform significantly better than the FY17 cohort.

FNArena's database shows two Buy ratings, four Hold and one Sell (UBS). The consensus target is $2.01, suggesting 0.5% upside to the last share price. Targets range from $1.75 (UBS) to $2.35 (Citi).

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