Wimbledon-based Arena Events (ARE:72p), a specialist provider of temporary physical structures, marquees, grandstands and ice rinks to major sporting, outdoor and leisure events, is delivering on the organic and bolt-on acquisition strategy I outlined when I initiated coverage on the shares at 62.5p ('Alpha Company Research: Arena Events', 26 Mar 2018). These factors also support my conservative 88p target price.
So far this year the company has made six acquisitions across the UK, Middle East and US which in aggregate made cash profits of £4.44m in their last financial years. About £14m of the £32.4m total consideration is deferred and dependent on some punchy earn-out targets being hit (analysts have embedded that half the deferred consideration will actually be paid) and has been structured in such a way that it is largely self-funded from the cash profits of the companies acquired. That’s really good business. The largest acquisitions were completed post the half-year end and are strategically the most important: California-based Stuart Rentals, a supplier of tents, staging equipment and flooring, gives Arena exposure to the West Coast US market, adds scale to its existing Americas national tenting business, and makes it the third-largest operator in a highly fragmented US market; and TGP, a Dubai-based exhibition stand design and build company that has multinational clients in the Middle East, has doubled Arena’s presence in the region, and given it an entry point into Saudi Arabia.
A placing over the summer raised £19m net of fees to fund the £13.5m of initial consideration on the Stuart Rentals and TGP acquisitions. Chief executive and 5.67 per cent shareholder Greg Lawless says that integrating these businesses into Arena’s existing operations offers decent scope for revenue synergies. He highlights that Arena’s Americas national tenting business could increase margins by around a tenth on some of the major events it supplies equipment too. He also notes that the board has not “been aggressive in its 2019 forecasts”.
Acquisition targets on the US East Coast are being considered to bolster the US footprint and geographic reach. Arena has funding to do more deals; half-year net debt of £17m is expected to fall to £13.7m by the year-end, equating to one times 2018 cash profits, reflecting the seasonality of the business as the summer months generate the lion’s share of annual profits. The sensibly priced debt facility is being tapped to create value for shareholders in other ways too. Finance director Piers Wilson highlights the recent purchase of £2m of equipment, saving the company £400,000 a year in rental fees and generating a 20 per cent return on capital.
Importantly, Arena is generating organic growth. Like-for-like sales in the UK increased by 13 per cent in the first half, buoyed by supplying temporary seating and structures for events including the Royal Wedding, Cheltenham Festival and BMW PGA Championship at Wentworth. Future prospects are underpinned by new contracts and renewals, including a five-year extension for the Wimbledon Tennis Championships. In the US, Arena has landed a six-year contract worth $2.5m (£1.9m) in annual revenues with the Farmers Insurance Golf Open, and a contract worth $12m over seven years for the US PGA’s three annual golf championships and the Ryder Cup in 2020 and 2024.
After factoring in the contribution from acquisitions, and existing contracts – Arena has never lost a major one – house broker Cenkos Securities predicts the company should make a 10 per cent cash profit margin on revenues of £137m in 2018, rising to a margin of 11 per cent on revenues of £163m in 2019. On this basis, expect pre-tax profits of £7m and EPS of 4.8p this year, increasing to £10.6m and 6.3p in 2019 to underpin dividend per share forecasts of 2p and 2.5p.
Investors are now warming to the investment case as Arena’s share price is 10 per cent since my last buy advice (‘Arena’s strategic bolt-on deals’, 23 August 2018). Trading on 11 times EPS estimates for 2019, and offering a 3.5 per cent prospective dividend yield, the shares are priced for further gains. Buy.
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