Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<div>
<p>On the 18 May, Aussie theme parks and movie theater operator <a href="https://www.smartkarma.com/entities/village-roadshow-ltd" target="_blank" data-smartkarma-citation="entities:7836:1" rel="noopener">Village Roadshow (VRL AU)</a> entered into <a href="https://www.asx.com.au/asxpdf/20200518/pdf/44hx6rjz13vp2b.pdf" target="_blank" rel="noopener">exclusive talks</a> with BGH Capital, which was followed on the 7 August with the <a href="https://www.asx.com.au/asxpdf/20200807/pdf/44l8s8vg0qgjdy.pdf" target="_blank" rel="noopener">entering</a> into an Implementation Agreement, such that VRL shareholders would receive, under Structure A, up to A$2.45/share comprising A$2.20/share (A$2.10/share under Structure B) plus an additional A$0.25/share upon the re-opening of theme parks and cinemas, and Queensland's border being open to any person from NSW and Victoria. </p>
<p>At the time, I viewed the offer as being overly wrought, highly opportunistic, and heavily caveated, enabling the key shareholders to remain largely invested in the back-end; and failing that option (Structure A) - penalizing minorities via a lower cash option under Structure B.</p>
<p>Mittleman Investments agreed, and <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02291037-3A552048?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">said</a> it intends to vote its shares against both alternatives. Spheria Asset Management <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02307851-3A555222?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">chimed</a> in early this month.</p>
</div>
<div>
<h3>A Recent Timeline of Events</h3>
</div>
<div>
<div>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 93.7143px;">
<h3>Date</h3>
</td>
<td style="width: 610.286px;">
<h3>Date in the Date</h3>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">29-Aug-19</td>
<td style="width: 610.286px;">
<p>Release of  <a href="https://www.asx.com.au/asxpdf/20190829/pdf/44800hyl7gkz2s.pdf" target="_blank" rel="noopener">FY19</a>  results. VRL reported an underlying profit of A$20.6mn in against a loss of $7.3mn the previous year. The company declared a return to dividends with a fully franked dividend of A$0.05/share. At the time of these full-year results, Burke said the key issues with John had largely been addressed.</p>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">19-Dec-19</td>
<td style="width: 610.286px;">Pacific Equity Partners <a href="https://www.asx.com.au/asxpdf/20191219/pdf/44cqw7hyn865wn.pdf" target="_blank" rel="noopener">tabled</a> a non-binding Offer at A$3.90/share, a 21.9% premium to last close, by way of a Scheme. PEP has also agreed to buy a 19% stake (at $3.90/share) from VRC, which would indicate Burke and the brothers are on the same page.<br><br>
<p>This is a <a href="https://www.asx.com.au/asxpdf/20191219/pdf/44cqwl4t5yh94r.pdf" target="_blank" rel="noopener">call option</a> on 19% of shares out - or Relevant Shares - between PEP and VRC. If an alternative offer is recommended by Village's board, the call option can be exercised. Voting remains with VRC until the Relevant Shares are exercised.</p>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">23-Jan-20</td>
<td style="width: 610.286px;">VRL received a non-binding, indicative <a href="https://www.asx.com.au/asxpdf/20200124/pdf/44dh80xy1977ll.pdf" target="_blank" rel="noopener">offer</a> from BGH Capital of $4.00/share, a 25% premium to last close, and a small premium to PEP's $3.90/share offer the previous month.</td>
</tr>
<tr>
<td style="width: 93.7143px;">19-Mar-20</td>
<td style="width: 610.286px;">
<p>VRL <a href="https://www.asx.com.au/asxpdf/20200319/pdf/44g6ftp3syn8tb.pdf" target="_blank" rel="noopener">said</a> they continue to assist PEP and BGH with their respective due diligence. Exposed to cinemas and theme parks amidst the virus - VLR was down 75% from its recent high at this time.</p>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">18-May-20</td>
<td style="width: 610.286px;">
<a href="https://www.asx.com.au/asxpdf/20200518/pdf/44hx6rjz13vp2b.pdf" target="_blank" rel="noopener">Enters</a> into exclusive discussions with BGH.</td>
</tr>
<tr>
<td style="width: 93.7143px;">16-Jun - 5-Aug</td>
<td style="width: 610.286px;">Various announcements extending the exclusivity agreement with BGH</td>
</tr>
<tr>
<td style="width: 93.7143px;">7-Aug-20</td>
<td style="width: 610.286px;">
<a href="https://www.asx.com.au/asxpdf/20200807/pdf/44l8s8vg0qgjdy.pdf" target="_blank" rel="noopener">Entering</a> into an Implementation Agreement with BGH. </td>
</tr>
<tr>
<td style="width: 93.7143px;">28-Aug-20</td>
<td style="width: 610.286px;"><a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02273676-3A548632?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">FY20 results</a></td>
</tr>
<tr>
<td style="width: 93.7143px;">25-Sep-20</td>
<td style="width: 610.286px;">"<a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02285343-3A551068?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">Film Deferral Event</a>" under the Implementation Agreement - no A$0.08/share additional payment.</td>
</tr>
<tr>
<td style="width: 93.7143px;">2-Oct-20</td>
<td style="width: 610.286px;">Mittleman bumps to <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02290462-3A551960?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">10.09%</a>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">7-Oct-20</td>
<td style="width: 610.286px;">Mittleman says it will vote <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02291037-3A552048?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">against</a>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">8-Oct-20</td>
<td style="width: 610.286px;">Spheria, having dipped below 5% back on xx, now has <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02292760-3A552377?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">6.20%</a>.</td>
</tr>
<tr>
<td style="width: 93.7143px;">9-Oct-20</td>
<td style="width: 610.286px;">Scheme Meeting <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02292036-3A552242?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">confirmed</a> for the 26 November</td>
</tr>
<tr>
<td style="width: 93.7143px;">12-Oct-20</td>
<td style="width: 610.286px;">Scheme Booklet <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02292758-3A552376?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">lodged</a> with ASIC and expected to be despatched on or before the 21 October, and the Scheme Meetings tentatively set for the 26 November.</td>
</tr>
<tr>
<td style="width: 93.7143px;">28-Oct-20</td>
<td style="width: 610.286px;">Spheria bumps to <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02302992-3A554387?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">7.80%</a>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">4-Nov-20</td>
<td style="width: 610.286px;">Mittleman bumps to <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02305802-3A554879?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">11.24%</a>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">9-Nov-20</td>
<td style="width: 610.286px;">Uplift of A$0.12/share <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02306239-3A554956?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">locked in</a>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">10-Nov-20</td>
<td style="width: 610.286px;">Mittleman bumps to <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02308127-3A555266?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">12.87%</a>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">12-Nov-20</td>
<td style="width: 610.286px;">Spheria says it will vote <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02307851-3A555222?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">against</a>
</td>
</tr>
<tr>
<td style="width: 93.7143px;">12-Nov-20</td>
<td style="width: 610.286px;">Mittleman bumps to <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02311114-3A555880?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">14.34%</a>
</td>
</tr>
</tbody>
</table>
</div>
</div>
<div>
<div style="text-align: left;" class="content-caption">Source: ASX</div>
</div>
<h3>The New News</h3>
<div></div>
<p>This morning, VRL <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02312095-3A556080?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">announced</a> it had agreed with BGH that the terms are now A$3.00 under the Structure A Scheme and A$2.95/share under the Structure B Scheme, as had been rumoured last Friday. <br><br>Spheria now intends to vote in favour of both A and B. No word from Mittleman as yet.<br><br>The Scheme Meeting will now expected to be held on the 7 December, subject to Court approval.</p>
<div>
<p>More below the fold.</p>
</div>
<div>
<p></p>
</div>


On the 18 May, Aussie theme parks and movie theater operator Village Roadshow (VRL AU) entered into exclusive talks with BGH Capital, which was followed on the 7 August with the entering into an Implementation Agreement, such that VRL shareholders would receive, under Structure A, up to A$2.45/share comprising A$2.20/share (A$2.10/share under Structure B) plus an additional A$0.25/share upon the re-opening of theme parks and cinemas, and Queensland's border being open to any person from NSW and Victoria. 
At the time, I viewed the offer as being overly wrought, highly opportunistic, and heavily caveated, enabling the key shareholders to remain largely invested in the back-end; and failing that option (Structure A) - penalizing minorities via a lower cash option under Structure B.
Mittleman Investments agreed, and said it intends to vote its shares against both alternatives. Spheria Asset Management chimed in early this month.


A Recent Timeline of Events







Date


Date in the Date



29-Aug-19

Release of  FY19  results. VRL reported an underlying profit of A$20.6mn in against a loss of $7.3mn the previous year. The company declared a return to dividends with a fully franked dividend of A$0.05/share. At the time of these full-year results, Burke said the key issues with John had largely been addressed.



19-Dec-19
Pacific Equity Partners tabled a non-binding Offer at A$3.90/share, a 21.9% premium to last close, by way of a Scheme. PEP has also agreed to buy a 19% stake (at $3.90/share) from VRC, which would indicate Burke and the brothers are on the same page.  
This is a call option on 19% of shares out - or Relevant Shares - between PEP and VRC. If an alternative offer is recommended by Village's board, the call option can be exercised. Voting remains with VRC until the Relevant Shares are exercised.



23-Jan-20
VRL received a non-binding, indicative offer from BGH Capital of $4.00/share, a 25% premium to last close, and a small premium to PEP's $3.90/share offer the previous month.


19-Mar-20

VRL said they continue to assist PEP and BGH with their respective due diligence. Exposed to cinemas and theme parks amidst the virus - VLR was down 75% from its recent high at this time.



18-May-20

Enters into exclusive discussions with BGH.


16-Jun - 5-Aug
Various announcements extending the exclusivity agreement with BGH


7-Aug-20

Entering into an Implementation Agreement with BGH. 


28-Aug-20
FY20 results


25-Sep-20
"Film Deferral Event" under the Implementation Agreement - no A$0.08/share additional payment.


2-Oct-20
Mittleman bumps to 10.09%



7-Oct-20
Mittleman says it will vote against



8-Oct-20
Spheria, having dipped below 5% back on xx, now has 6.20%.


9-Oct-20
Scheme Meeting confirmed for the 26 November


12-Oct-20
Scheme Booklet lodged with ASIC and expected to be despatched on or before the 21 October, and the Scheme Meetings tentatively set for the 26 November.


28-Oct-20
Spheria bumps to 7.80%



4-Nov-20
Mittleman bumps to 11.24%



9-Nov-20
Uplift of A$0.12/share locked in



10-Nov-20
Mittleman bumps to 12.87%



12-Nov-20
Spheria says it will vote against



12-Nov-20
Mittleman bumps to 14.34%







Source: ASX

The New News

This morning, VRL announced it had agreed with BGH that the terms are now A$3.00 under the Structure A Scheme and A$2.95/share under the Structure B Scheme, as had been rumoured last Friday.   Spheria now intends to vote in favour of both A and B. No word from Mittleman as yet.  The Scheme Meeting will now expected to be held on the 7 December, subject to Court approval.

More below the fold.





Village Roadshow: Rollercoaster Economics

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
<strong>Looking for Defensive Earnings in the Sector is Getting Tougher.</strong> We raised the bar on defence in our latest model portfolio update and added <strong>TME</strong> and <strong>NVT</strong> to the portfolio for the first time.  These two stocks are in a unique club.  Along with <strong>IVC</strong>, they are the only stocks in the sector that have outperformed during the correction and have seen upgrades to consensus earnings.  <strong>TME</strong> still looks cheap and attractive, while <strong>NVT</strong> is considering a private equity offer to buy the business and this has driven its outperformance.  <strong>IVC</strong> has relatively defendable earnings, which are likely to become scarcer across the market.</li>
<li>
<strong>Off on holidays and at play.</strong> Consumer spending is picking up in line with improving employment prospects, but more detailed data from the national accounts show there are some bright spots.  Spending on holiday Accommodation, Recreation Goods and Clothing and Footwear are punching above their weight.  The weaker currency is probably keeping more holidaymakers in Australia, while competition is putting downward pressure on prices and encouraging spending in the other two strong-performing categories.  Cost pressure from the weaker currency is also a concern. </li>
<li>
<strong>Bricks and Mortar Retail Still Looks Shaky, despite Recent Outperformance.</strong> The recent market correction has seen 9 of the 24 stocks in the Consumer Discretionary sector outperform.  Beaten-up retail stocks such as <strong>JBH</strong>, <strong>HVN</strong> and <strong>SUL</strong> have all outperformed during the downturn and are benefitting from the strength in spending on Recreation Goods, but these stocks have been downgraded in the process.  In our view, valuation support can only deliver temporary outperformance without an improving earnings outlook.  Beware of these stocks – they look like classic Value Traps.</li>
<li>
<strong>The Stocks Benefitting from Holiday Travel Look Too Difficult.</strong><strong>WEB, AAD</strong> and <strong>FLT</strong> all benefit from holiday spending and therefore look attractive after screening the national accounts data.  However, they have all underperformed during the correction.  <strong>WEB</strong> looks the most attractive, given its strong FY18 result and good performance for most of the year.  However, it’s probably vulnerable to the threat of rising airline charges that <strong>FLT </strong>management cited as a headwind for future earnings in last week’s downgrade.  <strong>AAD</strong> remains in a no-go zone – the stock has underperformed all year and the earnings outlook is uncertain.</li>
</ul>



Looking for Defensive Earnings in the Sector is Getting Tougher. We raised the bar on defence in our latest model portfolio update and added TME and NVT to the portfolio for the first time.  These two stocks are in a unique club.  Along with IVC, they are the only stocks in the sector that have outperformed during the correction and have seen upgrades to consensus earnings.  TME still looks cheap and attractive, while NVT is considering a private equity offer to buy the business and this has driven its outperformance.  IVC has relatively defendable earnings, which are likely to become scarcer across the market.

Off on holidays and at play. Consumer spending is picking up in line with improving employment prospects, but more detailed data from the national accounts show there are some bright spots.  Spending on holiday Accommodation, Recreation Goods and Clothing and Footwear are punching above their weight.  The weaker currency is probably keeping more holidaymakers in Australia, while competition is putting downward pressure on prices and encouraging spending in the other two strong-performing categories.  Cost pressure from the weaker currency is also a concern. 

Bricks and Mortar Retail Still Looks Shaky, despite Recent Outperformance. The recent market correction has seen 9 of the 24 stocks in the Consumer Discretionary sector outperform.  Beaten-up retail stocks such as JBH, HVN and SUL have all outperformed during the downturn and are benefitting from the strength in spending on Recreation Goods, but these stocks have been downgraded in the process.  In our view, valuation support can only deliver temporary outperformance without an improving earnings outlook.  Beware of these stocks – they look like classic Value Traps.

The Stocks Benefitting from Holiday Travel Look Too Difficult.WEB, AAD and FLT all benefit from holiday spending and therefore look attractive after screening the national accounts data.  However, they have all underperformed during the correction.  WEB looks the most attractive, given its strong FY18 result and good performance for most of the year.  However, it’s probably vulnerable to the threat of rising airline charges that FLT management cited as a headwind for future earnings in last week’s downgrade.  AAD remains in a no-go zone – the stock has underperformed all year and the earnings outlook is uncertain.


Aussie Consumers: Tough Shopping in a Down Market

Thematic (Sector/Industry)

<ul>
<li>
<strong>Solid Earnings Momentum Hits a Brick Wall. </strong>It’s still early days, with only 40% of stocks reporting during the first 2 weeks of reporting season, but cracks are beginning to appear in the earnings outlook.  FY18 expectations have been mostly met with a slight skew towards upside surprise in results.  However, FY19 earnings are under downward pressure led by the Resources, Financials and Consumer Discretionary.  </li>
<li>
<strong>Downgrades following Reporting: </strong><strong>WES, TLS, RIO, ORG, SUN, AGL, QBE, AZJ, CWN, DXS, SHL, TAH, VCX, DMP, SEK, IOF, LNK, MFG, NXT, ORA, NVT, PGH, SKC</strong> have all seen analysts cut 12-month forward earning growth by more than 3% during reporting season even though the market has responded reasonably positive to these stocks. <strong>COH</strong> guided to lower FY earnings growth than the market expected and <strong>ECX</strong> downgraded FY18 earnings during the first week of reporting season.</li>
<li>
<strong>Front Running Reporting: </strong><strong>ABP, FMG, SAR, NCM, TGR, BPT, AAD</strong> are all due to report during the next few weeks and have seen 12-month forward earnings downgraded by analysts.  These stocks are at risk of seeing a drop in FY19 guidance when they report even if there is a surprise in FY18. </li>
<li>
<strong>Downgrades for stocks not reporting: AWC, ILU, RWC, SFR, SIG, SIQ, SDA, XRO, WSA, FBU, XRO, DOW, IGO, RRL, BAL, AHY, DHG, GXY, ORE, IFN, NAN</strong> have all seen 12-month forward EPS growth downgraded in the past 2 weeks.</li>
<li>
<strong>Cost management Rather than Revenue Growth Driving Earnings:</strong> Cost pressures are well contained limited to stocks exposed to higher electricity costs and those in the aged care industry (labour).  Indeed, the beats on EPS (63%) are exceeding the beats on revenue.  The Banks are managing cost pressures in short-term funding markets by raising mortgage rates on interest-only and investor mortgages to satisfy the regulator.  Savers are also covering cost increases after seeing deposit rates trimmed.</li>
<li>
<strong>Capex for Offence and Defence.</strong> Growth stocks such as <strong>CSL, TWE</strong> and <strong>RMD</strong> are investing to deliver in long-term growth and the market is giving it a tick of approval to this strategy.  We hold <strong>CSL, TWE</strong> and <strong>COH</strong> in our portfolio and will stay for the ride even though valuation pressures are rising.  <strong>TLS</strong> and <strong>CBA</strong> are investing to shore-up earnings, leaving little room for near-to-medium-term earnings surprise; but valuations seem cheap. </li>
<li>
<strong>Holding Steady with our View.</strong> Despite the lift in downgrades, we will not make changes to our portfolio until reporting season is complete.  We’re disappointed in the downgrades to Materials, given our overweight position in Resources.  The strength in key commodities and weakness in the Australian dollar are diving strong FY18 results, but analysts seem to think the cycle has peaked.  </li>
</ul>



Solid Earnings Momentum Hits a Brick Wall. It’s still early days, with only 40% of stocks reporting during the first 2 weeks of reporting season, but cracks are beginning to appear in the earnings outlook.  FY18 expectations have been mostly met with a slight skew towards upside surprise in results.  However, FY19 earnings are under downward pressure led by the Resources, Financials and Consumer Discretionary.  

Downgrades following Reporting: WES, TLS, RIO, ORG, SUN, AGL, QBE, AZJ, CWN, DXS, SHL, TAH, VCX, DMP, SEK, IOF, LNK, MFG, NXT, ORA, NVT, PGH, SKC have all seen analysts cut 12-month forward earning growth by more than 3% during reporting season even though the market has responded reasonably positive to these stocks. COH guided to lower FY earnings growth than the market expected and ECX downgraded FY18 earnings during the first week of reporting season.

Front Running Reporting: ABP, FMG, SAR, NCM, TGR, BPT, AAD are all due to report during the next few weeks and have seen 12-month forward earnings downgraded by analysts.  These stocks are at risk of seeing a drop in FY19 guidance when they report even if there is a surprise in FY18. 

Downgrades for stocks not reporting: AWC, ILU, RWC, SFR, SIG, SIQ, SDA, XRO, WSA, FBU, XRO, DOW, IGO, RRL, BAL, AHY, DHG, GXY, ORE, IFN, NAN have all seen 12-month forward EPS growth downgraded in the past 2 weeks.

Cost management Rather than Revenue Growth Driving Earnings: Cost pressures are well contained limited to stocks exposed to higher electricity costs and those in the aged care industry (labour).  Indeed, the beats on EPS (63%) are exceeding the beats on revenue.  The Banks are managing cost pressures in short-term funding markets by raising mortgage rates on interest-only and investor mortgages to satisfy the regulator.  Savers are also covering cost increases after seeing deposit rates trimmed.

Capex for Offence and Defence. Growth stocks such as CSL, TWE and RMD are investing to deliver in long-term growth and the market is giving it a tick of approval to this strategy.  We hold CSL, TWE and COH in our portfolio and will stay for the ride even though valuation pressures are rising.  TLS and CBA are investing to shore-up earnings, leaving little room for near-to-medium-term earnings surprise; but valuations seem cheap. 

Holding Steady with our View. Despite the lift in downgrades, we will not make changes to our portfolio until reporting season is complete.  We’re disappointed in the downgrades to Materials, given our overweight position in Resources.  The strength in key commodities and weakness in the Australian dollar are diving strong FY18 results, but analysts seem to think the cycle has peaked.  


Aussie Reporting Season Update: Cracks in the Mirror

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

<p>We are bemused by <a href="https://www.smartkarma.com/entities/13682" target="_blank" data-smartkarma-citation="entities:13682:1">Ardent Leisure Group (AAD AU)</a>'s recent about-face on <a href="https://www.smartkarma.com/entities/7452" target="_blank" data-smartkarma-citation="entities:7452:1">Ariadne Australia Ltd (ARA AU)</a> board representation. After weeks of opposition, the sudden last-minute decision to "welcome" the two Ariadne nominees, Gary Weiss and Carl Richmond, on the Ardent Leisure board is curious to say the least.</p><p>Our AUD 2.15 fair value estimate is intact, as we still believe in the no-moat-rated group's turnaround potential. And we agree realisation of this potential is "best achieved by the establishment of a collaborative and unified board," as stoically declared by the Ardent board as justification for burying the hatchet with Ariadne.</p><p>However, one cannot help but be sceptical about how the board can suddenly become unified with the two Ariadne representatives. In fact, Ardent spent considerable energy opposing the appointment of these nominees, specifically pointing out their presence may bring "undue influence, disrupt execution of management's strategy and bring the potential for management instability." Securityholders have now been assured all these concerns have suddenly disappeared and all is harmonious around the board table.</p><p>We hope so.</p><p>New CEO Simon Kelly's blueprint for turning Ardent around is cogent, with a more refined Main Event roll-out, stringent site selection for that expansion, capital discipline, operating efficiency improvement, and corporate cost rationalisation all targeted as key focus areas. It is also all-encompassing and would need refinement as the plan progresses, for example, cluster versus "beachhead in new markets" strategy when it comes to rolling out Main Event venues, and initiatives to drive theme park attendance and per-capita spending. Faced with executing on these priorities, the last thing Ardent securityholders need is a board who begins to second-guess itself and management, due to clashes in opinions and personalities between the incumbent members and the new Ariadne representatives.</p><p>Our AUD 2.15 intrinsic value assessment for Ardent assumes Main Event EBITDA generates five-year EBITDA CAGR of 21%, as the number of venues increases from 37 to 78 over that timeframe and EBITDA margin improves from the depressed 20.3% in fiscal 2017 to 25.5% in five years' time. It also incorporates a recovery in theme parks, from a Dreamworld-impacted loss of AUD 3 million in fiscal 207 to an EBITDA of AUD 46 million in five years' time. This compares with theme park division's six-year historical average of AUD 32 million per year before the Dreamworld tragedy in fiscal 2017.</p><p>While we believe this turnaround to be achievable, its execution is far from being a walk in the park. It requires rolling out Main Event venues in a fiscally-disciplined manner, as opposed to the previous wanton strategy of hitting 200 venues sometime in the future. It also requires nitty-gritty focus on the operating front, in terms of efficiency improvement, cost control and targeting marketing (as opposed to the previous catch-all aim of attracting more customers on the back of the previous CEO's experience in consumer-marketing).</p><p>Furthermore, the competitive landscape is unlikely to get easier, especially in the U.S. where Ardent has effectively bet the group on the success of Main Event. For instance, U.S. peer Dave and Buster's recent result showed comparable-store sales growth of just 1.1% in the three months ended July 2017, with management downgrading current full fiscal year comparable-store sales growth to 1% to 2%, down from 2% to 3% previously. This is hardly a good near-term backdrop for Ardent, as it tries to improve Main Event's earnings, with recent hurricane activities in and around Houston also impacting five to eight venues.</p><p>This underscores the importance of management having the full backing of a unified board. Turnaround of Ardent will not be smooth and management will need all the counsel and guidance it can get from the board. To this end, we note that Ardent's current nine-person board contains two members with significant U.S. leisure and entertainment experience, namely, Randy Garfield and one of Ariadne's representatives in Carl Richmond. Their presence will be critical, especially with the impending retirement of two Australia-based directors.</p><p><em>Analyst: Brian Han</em></p>

We are bemused by Ardent Leisure Group (AAD AU)'s recent about-face on Ariadne Australia Ltd (ARA AU) board representation. After weeks of opposition, the sudden last-minute decision to "welcome" the two Ariadne nominees, Gary Weiss and Carl Richmond, on the Ardent Leisure board is curious to say the least.Our AUD 2.15 fair value estimate is intact, as we still believe in the no-moat-rated group's turnaround potential. And we agree realisation of this potential is "best achieved by the establishment of a collaborative and unified board," as stoically declared by the Ardent board as justification for burying the hatchet with Ariadne.However, one cannot help but be sceptical about how the board can suddenly become unified with the two Ariadne representatives. In fact, Ardent spent considerable energy opposing the appointment of these nominees, specifically pointing out their presence may bring "undue influence, disrupt execution of management's strategy and bring the potential for management instability." Securityholders have now been assured all these concerns have suddenly disappeared and all is harmonious around the board table.We hope so.New CEO Simon Kelly's blueprint for turning Ardent around is cogent, with a more refined Main Event roll-out, stringent site selection for that expansion, capital discipline, operating efficiency improvement, and corporate cost rationalisation all targeted as key focus areas. It is also all-encompassing and would need refinement as the plan progresses, for example, cluster versus "beachhead in new markets" strategy when it comes to rolling out Main Event venues, and initiatives to drive theme park attendance and per-capita spending. Faced with executing on these priorities, the last thing Ardent securityholders need is a board who begins to second-guess itself and management, due to clashes in opinions and personalities between the incumbent members and the new Ariadne representatives.Our AUD 2.15 intrinsic value assessment for Ardent assumes Main Event EBITDA generates five-year EBITDA CAGR of 21%, as the number of venues increases from 37 to 78 over that timeframe and EBITDA margin improves from the depressed 20.3% in fiscal 2017 to 25.5% in five years' time. It also incorporates a recovery in theme parks, from a Dreamworld-impacted loss of AUD 3 million in fiscal 207 to an EBITDA of AUD 46 million in five years' time. This compares with theme park division's six-year historical average of AUD 32 million per year before the Dreamworld tragedy in fiscal 2017.While we believe this turnaround to be achievable, its execution is far from being a walk in the park. It requires rolling out Main Event venues in a fiscally-disciplined manner, as opposed to the previous wanton strategy of hitting 200 venues sometime in the future. It also requires nitty-gritty focus on the operating front, in terms of efficiency improvement, cost control and targeting marketing (as opposed to the previous catch-all aim of attracting more customers on the back of the previous CEO's experience in consumer-marketing).Furthermore, the competitive landscape is unlikely to get easier, especially in the U.S. where Ardent has effectively bet the group on the success of Main Event. For instance, U.S. peer Dave and Buster's recent result showed comparable-store sales growth of just 1.1% in the three months ended July 2017, with management downgrading current full fiscal year comparable-store sales growth to 1% to 2%, down from 2% to 3% previously. This is hardly a good near-term backdrop for Ardent, as it tries to improve Main Event's earnings, with recent hurricane activities in and around Houston also impacting five to eight venues.This underscores the importance of management having the full backing of a unified board. Turnaround of Ardent will not be smooth and management will need all the counsel and guidance it can get from the board. To this end, we note that Ardent's current nine-person board contains two members with significant U.S. leisure and entertainment experience, namely, Randy Garfield and one of Ariadne's representatives in Carl Richmond. Their presence will be critical, especially with the impending retirement of two Australia-based directors.Analyst: Brian Han

Let's Hope Board Harmony Runs Deep as Ardent Leisure Management Embarks on a Turnaround Journey

<p>We recommend <a href="https://www.smartkarma.com/entities/13682" target="_blank" data-smartkarma-citation="entities:13682:1">Ardent Leisure Group (AAD AU)</a> securityholders vote AGAINST <a href="https://www.smartkarma.com/entities/7452" target="_blank" data-smartkarma-citation="entities:7452:1">Ariadne Australia Ltd (ARA AU)</a>'s resolutions to appoint two directors to the group's board at the General Meeting on Sept. 4, 2017.</p><p>Credit should be given to 10.9% shareholder Ariadne and its associates for their intense agitation. Their pressure for board change and vocal criticism of Ardent's complacency have been the key catalyst for the group's recent burst of actions, including the CEO change, the Main Event strategic review, and the board renewal process. These are initiatives that may have already been on Ardent board's agenda, but have clearly been afforded greater urgency thanks to Ariadne's creep up the register.</p><p>However, the last thing management and securityholders of no-moat-rated Ardent needs now is a fractured board. New CEO Simon Kelly recently unveiled a comprehensive strategic blueprint, leaving no stones unturned. A more refined Main Event rollout, stringent site selection for that expansion, capital discipline, operating efficiency improvement, and corporate cost rationalisation have all been trumpeted as key focus in the future. With accountability measures set, we believe this management should be given a chance to execute on the plan, without a divided board second-guessing its moves along the way.</p><p>Further, the recent appointment of highly-experienced Randy Garfield as a director shows Ardent is committed to instilling a much-needed U.S. leisure and entertainment voice on the board. The group is also in advanced discussions with another heavy hitter with significant experience in U.S. multisite, leisure industry to join the board. These additions will be invaluable as Ardent strives to improve the performance of Main Event, the U.S.-based multisite family entertainment unit on which the board has bet the entire group.</p><div class="content-highlight"><p>There is no change to our AUD 2.15 fair value estimate on no-moat-rated Ardent, and securities are trading at a 10% discount to this intrinsic assessment.</p></div><p><em>Analyst: Brian Han</em></p>

We recommend Ardent Leisure Group (AAD AU) securityholders vote AGAINST Ariadne Australia Ltd (ARA AU)'s resolutions to appoint two directors to the group's board at the General Meeting on Sept. 4, 2017.Credit should be given to 10.9% shareholder Ariadne and its associates for their intense agitation. Their pressure for board change and vocal criticism of Ardent's complacency have been the key catalyst for the group's recent burst of actions, including the CEO change, the Main Event strategic review, and the board renewal process. These are initiatives that may have already been on Ardent board's agenda, but have clearly been afforded greater urgency thanks to Ariadne's creep up the register.However, the last thing management and securityholders of no-moat-rated Ardent needs now is a fractured board. New CEO Simon Kelly recently unveiled a comprehensive strategic blueprint, leaving no stones unturned. A more refined Main Event rollout, stringent site selection for that expansion, capital discipline, operating efficiency improvement, and corporate cost rationalisation have all been trumpeted as key focus in the future. With accountability measures set, we believe this management should be given a chance to execute on the plan, without a divided board second-guessing its moves along the way.Further, the recent appointment of highly-experienced Randy Garfield as a director shows Ardent is committed to instilling a much-needed U.S. leisure and entertainment voice on the board. The group is also in advanced discussions with another heavy hitter with significant experience in U.S. multisite, leisure industry to join the board. These additions will be invaluable as Ardent strives to improve the performance of Main Event, the U.S.-based multisite family entertainment unit on which the board has bet the entire group.There is no change to our AUD 2.15 fair value estimate on no-moat-rated Ardent, and securities are trading at a 10% discount to this intrinsic assessment.Analyst: Brian Han

Vote AGAINST Ariadne's Resolutions to Appoint Nominees on Ardent Leisure's Board

Australia

Ardent Leisure Group is a trust established to acquire and invest in leisure and entertainment properties in Australia. The Trust's property portfolio comprises theme parks, bowling centers, and  health clubs as well as a portfolio of family entertainment assets in the United States.

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Ardent Leisure Group (AAD AU)

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Let's Hope Board Harmony Runs Deep as Ardent Leisure Management Embarks on a Turnaround Journey

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Vote AGAINST Ariadne's Resolutions to Appoint Nominees on Ardent Leisure's Board

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