Wimbledon-based Arena Events (ARE:65p), a specialist provider of temporary physical structures, marquees, grandstands and ice rinks to major sporting, outdoor and leisure events, listed its shares on Aim last summer. Led by 58-year old chief executive and 5.67 per cent shareholder Greg Lawless, who has held the role since 2011, Arena has grown by a series of acquisitions in the UK in recent years. This has enabled the business to add scale and secure major contracts including one with the US PGA.
In fact, such is the company’s presence within the sporting industry, a segment accounting for 60 per cent of its annual revenue, that it now has operational bases in seven countries and provides bespoke services to over 300 events each year across 15 countries. Arena’s core rental inventory of 300,000 sq metres of temporary structures and 125,000 demountable seats provides the grandstands and marquees to cater for the needs of visitors to the British Open, US Open, the ATP World Tennis Finals, Henley Royal Regatta, and major horse racing festivals at Cheltenham, Aintree, Newmarket and Epsom. The 10 largest sporting events in the UK attract almost 2.5m spectators each year, highlighting the solid recurring revenue for Arena, a market leader in its field.
With the benefit of a high-profile public listing, Arena has made four bolt-on acquisitions this year, the latest being the £2.5m purchase of a specialist barrier and fencing company, Events Solutions, a business that made pre-tax profit of £400,000 on revenue of £2.5m in 2017. The maximum consideration of £2.5m looks a fair price. Strategically, it makes sense by strengthening Arena Events offering to clients. Other acquisitions made this year include a specialist furniture hire company and a temporary refrigeration supplier.
Taking into account the contribution from acquisitions, and major contract wins – Arena’s US operation landed a lucrative five-year contract with the US PGA Tour in 2017 worth around $40m (£30m) in revenue, the largest in the company’s history – Arena is bang on track to hit house broker Cenkos Securities’ profit estimates. Analysts at the brokerage are forecasting a 21 per cent rise in full-year cash profits to £12.8m on revenues of £115m to produce pre-tax profits of £6.2m, EPS of 4.7p and a 42 per cent hike in the dividend to 2p a share.
The board have also announced that they have reached a settlement with the US authorities regarding a contract issue that only emerged in late March and related to a former client at its US subsidiary, Arena Americas. Arena had acted as a sub-contractor on a US Department of Defense contract, providing tenting equipment – an area outside its normal activities, which are focused on supplying corporate customers for major sporting, music and exhibitions. It was unaware that the client had violated the conditions of the US Small Business set-aside programme when it won its contract, and Arena admits no wrong doing. However, to avoid uncertainty over litigation it has agreed to make a $4.8m (£3.7m) settlement – payable in five annual instalments of $960,000 to be funded from the profits and cash flow from the US business. Although there is a potential contingent $3m settlement, too, this is highly unlikely to be paid as it would require Arena’s US business to almost treble its revenues to $150m and lift its pre-tax profit fivefold by 2022. More importantly, it puts the matter to rest and removes the uncertainty that has been weighing on Arena’s share price.
As I noted when I initiated coverage, at 62.5p, in my 5,000 word small-cap company report ('Alpha Company Research: Arena Events’, 26 Mar 2018), since when the company has paid a final dividend of 0.9p a share, the highly cash-generative company is able to use its strong operating cash flow to fund bolt-on acquisitions while at the same time adopting a progressive dividend policy. The above-average operational leverage of the business explains why cash profit is predicted to rise by 12.5 per cent to £14.4m on 5.5 per cent higher revenue of £121m in 2019, an outcome that should drive up pre-tax profit and EPS by 28 per cent to £7.9m and 6p, respectively.
Furthermore, with likely year-end net debt of £14.1m well within low-cost banking facilities of £34.3m, and representing comfortable gearing of 25 per cent of shareholders' funds, then there is also scope to tap credit facilities to make further earnings-accretive bolt-on deals. In fact, both the 2018 and 2019 EPS estimates are around 10 per cent higher now than they were when I commenced coverage four months ago after factoring in the benefits of this year's acquisitions. The board are assessing a number of further deals.
Rated on a 2019 forecast PE ratio of 11, and offering a prospective dividend yield of 3.7 per cent based on a payout of 2.4p a share next year, I continue to believe that Arena Events’ shares offer considerable upside to my 88p target price based on a fair value 2019 PE ratio of 14.5. Buy.
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