In last week’s column, I looked at Hollywood Bowl (BOWL) and came to the conclusion that it was a very good business trading on a reasonable valuation. In doing so, it appeared that one of its rivals, Ten Entertainment Group (TEG) was also a pretty good business trading on a very cheap valuation. So this week I’ve decided to take a closer look at TEG to see why its shares are so much cheaper than Hollywood Bowl’s and whether that is unjustified.
The business
The company trades under the Tenpin brand and has a very similar business model to Hollywood Bowl. It currently trades from 44 sites with an average of 24 bowling lanes each in an overall area of 30,000 square feet (sq ft).
As well as bowling, the company makes money from amusements, soft play areas, table tennis, food and drinks. Like Hollywood Bowl, it is tapping into the growing trend of people and families wanting to spend more money on experiences rather than consumer goods and is aiming to offer this at value-for-money prices.
The UK ten-pin bowling market grew by 23 per cent between 2013 and 2018, according to Mintel, and was worth £311m of revenue in 2018. TEG is the second biggest player in the market behind Hollywood Bowl, with a revenue share of the market of just under 25 per cent.
In 2018, the company’s split of revenue was broken down into the following segments:
- Bowling: 48 per cent.
- Amusements & games: 26 per cent.
- Drinks: 17 per cent.
- Food: 9 per cent.
In terms of strategy, there are many similarities to Hollywood Bowl. Many of its sites are located in retail or leisure parks next to cinemas and restaurants where footfall is high.
It is also looking to improve the performance of its existing assets. It is focusing on improving the customer experience and encouraging people to stay longer in their centres and spend more money. It is spending money on refurbishing its sites to improve their attractions to customers and this seems to be working well.
By innovating with new bowling games and scoring systems it is aiming to keep existing customers happy and woo new ones. The company is also putting new bowling machines into its centres – referred to as its Pins and Strings strategy – which require less maintenance, are easier to operate and improve the customer experience.
Just under half of the Tenpin outlets have had the new machines installed at a cost of £215,000, which means the potential for profit uplift in the years ahead remains good. The company says that the profit uplift on the cost of putting the machines in equates to a return on investment of 45 per cent.
It claims to be making 50 per cent on refurbishments, which is very impressive – but not to be mistaken for thinking that the bowling centres as a whole make this type of returns.
These self-help initiatives are bearing fruit, as evidenced by an increasing spend per head, per visit and consistent growth in like-for-like sales over the past few years. The company has proved to be good at managing its prices and trading off higher prices at peak times while bringing in more customers at quieter times during the week.
Like-for-like sales growth
Year | Spend per head per visit | Like-for-like sales growth % |
2018 | £14.76 | +2.7 |
2017 | £14.21 | +3.6 |
2016 | £14.15 | +2.8 |
2015 | £13.59 | +9.8 |
2014 | £13.28 | +6.6 |
Source: Company reports
One of the key risks I see for TEG and Hollywood Bowl is whether they can maintain the impressive profit uplifts that are coming from their refurbishments. The refurbishment cycle is about six to seven years according to both companies, but has the easy money been made? Will spending money again in a few years’ time give the same profit uplifts?
Another key part of the company’s strategy is buying bowling centres owned by smaller operators and independents. There are 117 bowling centres in the UK that fall into this category, according to TEG. It has been buying bowling centres that have been underinvested and is paying quite low profit multiples for them (an average of 3.4 times trailing Ebitda when the refurbishment spending is included) and getting profit uplifts that equate to a 30 per cent return on the money invested.
This is clearly a value-enhancing activity and one that may well complement the company’s self-help activities in the years ahead. TEG reckons that there are around 60 sites in the UK that it could potentially buy. Whether is faces competition for these sites from the likes of Hollywood Bowl and new entrants such as Disco Bowl – which could push up acquisition prices and push down returns on investment – remains to be seen.
Financial performance of the business
On my go-to measures, such as operating margin, ROCE and free cash flow margin, TEG is not as good as Hollywood Bowl, but still stacks up reasonably well. Its incremental returns since 2014 have been pretty good. It has added an extra £29.5m of annual sales, £10.5m of operating profit and £5.1m of additional free cash flow. This equates to incremental profit margins of 35.7 per cent, ROCE of 34 per cent and free cash flow margins of 17.1 per cent.
If we compare these numbers with the incremental returns that Hollywood Bowl has delivered between 2013 and 2018 then they are not as good at what its rival has been able to produce. Hollywood Bowl added £53.7m of additional turnover, £24.9m of additional operating profit and £23.2m of additional free cash flow for additional investment of £82.9m. This adds up to incremental operating margins, ROCE and free cash flow margins of 46.3 per cent, 30 per cent and 43.4 per cent, respectively.
Of course, the past performance may not indicate what will happen in the future, but the margin and free cash flow return from Hollywood Bowl’s investment lead me to keep my view that it is doing a slightly better job, but that TEG is doing a perfectly good one.
Ten Entertainment historical financial performance
Year (£m) | 2014 | 2015 | 2016 | 2017 | 2018 |
Turnover | 46.8 | 53.0 | 67.3 | 71.0 | 76.4 |
Ebitda | 5.7 | 10.2 | 17.6 | 19.0 | 20.6 |
Operating profit | 3.6 | 6.0 | 13.2 | 13.8 | 14.2 |
Post-tax profit | N/a | N/a | 9.6 | 10.5 | 10.8 |
Capital employed | 42.7 | 63.6 | 68.1 | 65.6 | 73.7 |
Capex | 2.0 | 1.3 | 2.9 | 3.6 | 8898.0 |
Operating cash flow | 6.3 | 7.3 | 14.8 | 13.3 | 20.8 |
Free cash flow (FCF) | 3.8 | 5.3 | 10.9 | 7.2 | 8.9 |
Ratios: | 2014 | 2015 | 2016 | 2017 | 2018 |
Sales growth | 13.1% | 27.1% | 5.5% | 7.5% | |
Ebitda margin | 12.2% | 19.2% | 26.2% | 26.8% | 26.9% |
Ebit margin | 7.72% | 11.39% | 19.58% | 19.38% | 18.54% |
Lease adj ROCE | 7.6% | 8.2% | 12.8% | 13.4% | 12.8% |
ROCE | 8.5% | 9.5% | 19.4% | 21.0% | 19.2% |
FCF margin | 8.1% | 10.1% | 16.2% | 10.1% | 11.6% |
Operating cash conversion | 175% | 121% | 112% | 97% | 147% |
FCF conversion | N/A | N/A | 113% | 68% | 82% |
HWB Changes (£m) | 2015 | 2016 | 2017 | 2018 | Cumulative |
Turnover | 6.1 | 14.4 | 3.7 | 5.3 | 29.5 |
Ebitda | 4.5 | 7.4 | 1.4 | 1.5 | 14.8 |
Operating profit | 2.4 | 7.1 | 0.6 | 0.4 | 10.5 |
Capital employed | 20.9 | 4.5 | -2.5 | 8.1 | 31.0 |
Operating cash flow | 1.0 | 7.4 | -1.5 | 7.5 | 14.5 |
FCF | 1.5 | 5.5 | -3.7 | 1.7 | 5.1 |
Incremental: | |||||
Ebit margin | 39.3% | 49.8% | 15.7% | 7.4% | 35.7% |
ROCE | 11.6% | 160.5% | -23.8% | 4.9% | 34.0% |
FCF margin | 25.2% | 38.6% | -99.0% | 31.3% | 17.1% |
Sources: Company reports/Investors Chronicle
One possible slight concern is that profit growth was fairly lacklustre in 2018. There are some good reasons for this. The warm summer saw reduced footfall while four acquired sites that were underinvested needed more staff to improve the customer experience. This led to a sub-optimal profit performance from them – they lost money during the first half of last year – which should not be repeated in 2019.
Forecasts and valuation
This year seems to be shaping up well so far. Trading for the first 11 weeks of 2019 was good, with like-for-like (LFL) sales up 5.1 per cent. The current spell of wet weather could also be helpful to trading. Cost inflation – labour, business rates, rents and utilities – needs to be watched, but the company should benefit from renegotiating lower rents on seven of its sites last year. Profits are therefore expected to show healthy levels of growth on 2018. Net debt levels – excluding operating lease debt, which will come on balance sheet shortly – are expected to remain minimal.
Ten Entertainment forecasts
Year (£m) | 2019 | 2020 | 2021 |
Turnover | 84.1 | 90 | 94 |
EBITDA | 24.3 | 27.2 | 28.2 |
EBIT | 17.4 | 19.7 | 20.5 |
Pre-tax profit | 16.7 | 19.1 | 19.6 |
Post-tax profit | 13.4 | 15.3 | 16.2 |
EPS (p) | 20.9 | 24.1 | 25.4 |
Dividend (p) | 12.3 | 14 | 14.4 |
CAPEX | 5.6 | 5.3 | 6 |
Free cash flow | 12.7 | 15.8 | 19 |
Net borrowing | 3.1 | 2.9 | -2.1 |
NAV | 61.8 | 70.1 | - |
Like for like sales growth % | 3.6 | 3 | 2.5 |
Source: SharePad
With continuing self-help initiatives, continued growth in the UK bowling market and possible value-enhancing acquisitions, the medium-term outlook for this company looks very reasonable to me. The value for money offered by bowling relative to other leisure activities gives the company a reasonable amount of recession resilience in my view, but I would not go as far as to say that it is completely recession-proof by any means.
I do think that TEG shares look attractively valued. At 215p, they trade on a one-year rolling forecast price/earnings (PE) ratio of just 9.6 times while offering a forecast dividend yield of 5.7 per cent with a growing dividend. This compares with Hollywood Bowl on 15.9 times and offering a dividend yield of 3.4 per cent.
The absolute and relative valuation of TEG look too low to me. It is also possible that the shares have suffered due to the ongoing problems at Woodford investment Management, which held over 10 per cent of the shares and looks to have been selling them to cover fund redemptions. This may give nimble private investors the opportunity to bag themselves a bargain.
