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

Busting to Release Value as Ariadne Rides onto Ardent Leisure's Register

Not Much Fun In Leisure; Ardent Leisure Undervalued While Event Hospitality Worth Monitoring

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Equity Bottom-Up

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.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

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