Wimbledon-based Arena Events (ARE:66p), a specialist provider of temporary physical structures, marquees, grandstands and ice rinks to major sporting, outdoor and leisure events, has made two important earnings-enhancing acquisitions since I updated the investment case a fortnight ago (‘On track for profitable growth’, 6 August 2018).
Arena is paying an initial consideration of $10.6m (£8.3m) for California-based Stuart Rentals, a supplier of tents, staging equipment and flooring, and a maximum capped earn-out of $6.4m over the next three financial years. Stuart Rentals services more than 10,000 events each year and boasts Berkeley and Stanford Universities as clients, as well as large corporations such as electric car maker Tesla. Strategically, the deal makes sense, increasing Arena’s share by a third to 8 per cent in the US to become the third-largest operator in a highly fragmented market, and providing it with an entry point into the west coast region. The $17m maximum cost equates to 6.5 times the target’s cash profits last year and 10.6 times operating profit.
The company is also acquiring TGP, a Dubai-based exhibition stand design and build company that has multinational clients in the Middle East including Coca-Cola, General Electric, FedEx and Etihad. Arena is paying an initial $7.2m and a maximum earn-out of $10.7m. That seems a fair price in relation to the £1.1m of cash profit and £0.8m of operating profit the business made last year, all of which is net profit given no tax is paid in the region. TGP more than doubles Arena’s presence in the Middle East, reduces the seasonality of its business, and should provide a springboard into Saudi Arabia.
The company funded the initial consideration for both deals, and others in the pipeline, by way of a £20m placing pitched at 60p a share that has been backed by the board of directors. Importantly, the acquisitions boost earnings per share (EPS) even after taking into account a raised share count. Factoring in a three-month contribution from the two acquisitions and others made this year, house broker Cenkos Securities predicts 2018 EPS will treble to 4.8p in 2018, rising by almost a third again to 6.3p in 2019 (a 5 per cent upgrade) based on Arena lifting 2019 revenues by a fifth to £150m to deliver pre-tax profit of £10.6m. Expect a well-covered payout per share of 2p and 2.5p for the respective years, implying prospective dividend yields of 3 and 3.8 per cent. Forecast closing net debt of £10.8m by end-December 2018 is well within Arena’s low-cost banking facilities of £34.3m, providing funding for further earnings-accretive bolt-on deals.
Trading on a modest 10 times 2019 EPS estimates, I see significant upside to the 88p target price I outlined when I initiated coverage at 62.5p ('Alpha Company Research: Arena Events’, 26 Mar 2018). Buy.
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