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Arena’s recovery potential

The provider of temporary physical structures, marquees, grandstands delivered strong profit growth despite being hit by overtrading issues at its UK operation last year, and looks set for another year of growth
April 11, 2019

Wimbledon-based Arena Events (ARE:39p), a specialist provider of temporary physical structures, marquees, grandstands and ice rinks to major sporting, outdoor and leisure events, has issued annual results in line with the downgraded guidance given by the directors in January when they revealed its UK operations had been overtrading (‘Arena overtrading creates buying opportunity’, 17 January 2019).

The issue has not been winning new work – the order book is healthy and Arena has a raft of multi-year contracts – but key personnel in charge of running the UK division found themselves out of their depth when activity levels picked up sharply. So, although UK divisional revenues increased from £45m to £54m in 2018, cash profits reversed from £5m to £2.7m. In particular, local management had underestimated the cost of delivering one-off contracts for the Ryder Cup in France and Nordea Masters in Sweden, having failed to understand the challenges and costs associated with operating in these overseas jurisdictions. For instance, labour laws limited the number of working hours, so agency workers had to be brought in to ensure timelines were met.

Group finance director Piers Wilson says that both events only produced a break-even result on revenues of £4.5m, rather than delivering £1.5m of cash profit as had been budgeted for. Moreover, the situation was exacerbated by the failure of the divisional directors to successfully integrate warehouse facilities at one depot in St Ives, Cambridgeshire, forcing Arena to take on an adjacent warehouse. The £400,000 planned cost savings from the move will no longer materialise, but at least the operational issues have been addressed.

Both group chief executive Greg Lawless and finance director Piers Wilson have been overseeing the restructuring of the UK operations, having previously given local management too much autonomy given that the unit had been a consistent and reliable performer. They have appointed a new divisional chief executive, finance director and managing director, and board-level approval is now required for all £1m-plus revenue contracts. Also, all overseas contracts are put under far more scrutiny to mitigate execution risk. For instance, Arena will only ship equipment to Japan to fulfil its £3m contract for the Tokyo Olympics and a third party will take on the risk of delivering on the project.

Strong organic growth from The Americas and Middle East

The issues in the UK somewhat overshadowed a strong organic sales and cash profit performance from Arena’s US and Middle Eastern divisions. The Americas delivered underlying revenue growth of 7 per cent and lifted cash profits by a third on the same basis, buoyed by contracts including the US PGA Championship. The US division reported a 19 per cent year-on-year rise in revenues to £52m and annual cash profits up two-thirds to £7.2m after accounting for last autumn’s acquisition of California-based Stuart Rentals, a supplier of tents, staging equipment and flooring. Arena is now the third-largest operator in a highly fragmented US market. Golf is a major earner for the company globally and new events this year include the Farmers Insurance Open in San Diego and the Dubai Desert Classic.

The Middle East and Asia division also increased its cash profits by two-thirds to £3.3m on revenues up by 46 per cent to £28.5m. Around half the growth was organic and the balance mainly came from three acquisitions, the largest of which was TGP, a Dubai-based exhibition stand design company that has multinational clients in the region. Contracts this year include delivering temporary hospitality facilities for the Rugby World Cup in Japan and additional work in Korea. Mr Lawless pointed out that the order book for 2020 is building and the division is looking to secure joint opportunities for work on the massive Dubai Expo 2020, which starts in October 2020 and runs for six months. The Expo site covers a total of 438 hectares.

Excluding exceptional costs, Arena delivered a 35 per cent rise in adjusted pre-tax profits to £5.3m and 19 per cent higher adjusted earnings per share (EPS) of 3.7p to support an 11 per cent rise in the dividend per share to 1.5p. The final dividend of 1p a share goes ex-dividend on 13 June 2019. On this basis, the shares are rated on an historic price/earnings (PE) ratio of 10 and offer a dividend yield of 3.9 per cent, a rating that fails to take into account the fact that management has already taken corrective action to restructure the UK division and will focus its attention this year on reaping the benefits from the eight acquisitions made in 2018, building the order book for 2020 and consolidating the business.

Guidance for the year ahead

Analysts at house broker Cenkos Securities are taking a more conservative view for the year ahead, predicting that Arena will lift both revenues and pre-tax profits by just over a fifth to £163m and £6.5m, respectively. On this basis, expect 2019 EPS of 4p and a dividend per share of 1.6p based on a 40 per cent payout ratio of net profits. Please note that 2019 EPS growth is forecast to lag that of pre-tax profit due to the higher average weighted number of shares in issue following the issue of 33.3m shares in last summer’s £20m placing at 60p a share which funded the Stuart Rentals and TGP acquisitions. Still, it’s earnings growth nevertheless. 

Importantly, Arena has no funding issues as the company has a £35m bank facility with HSBC, and closing net bank debt of £19.2m is well within its credit lines. Interestingly, Mr Lawless told me during our results call that the previous owners of Stuart Rentals will be taking their earn-out of $400,000 (£300,000) in equity rather than cash, a sign that they believe Arena’s shares are undervalued and have recovery potential. The directors control 4.76 per cent of the shares in issue, so have significant skin in the game too. They also confirmed to me that all eight acquisitions made last year are trading in line with guidance given when they came under Arena's ownership.

So, although the holding has disappointed since I advised buying the shares ('Alpha Company Research: Arena Events’, 26 March 2018), I firmly believe that Arena’s UK business has strong recovery potential, and along with organic growth overseas this should drive profits higher this year, and next. In fact, a return to my entry point around the 60p mark, equating to 12 times 2020 EPS estimates of 5p, is not an unrealistic target if you are willing to take a 12-month view. Recovery buy.

■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.