Join our community of smart investors

Arena’s warning unseats investors

The specialist provider of temporary physical structures, marquees, grandstands and ice rinks has downgraded profit guidance again
September 11, 2019

Wimbledon-based Arena Events (ARE:21p), a specialist provider of temporary physical structures, marquees, grandstands and ice rinks to major sporting, outdoor and leisure events, has downgraded profit guidance again, having previously revealed in January that the company’s UK operations had been overtrading.

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. A new divisional chief executive, finance director and managing director have been appointed, but the restructuring is taking longer than expected and further operational improvements are needed to be made in the St Ives warehouse and planning and project departments. During our results call this morning, Mr Lawless said that planned savings for the full year are £400,000 behind target, but the UK restructuring should be complete before the year-end.

Unfortunately, the UK division’s performance is also being held back by a tighter labour market which has led to margin pressure – divisional gross margins declined by 1.7 percentage points to 28.1 per cent in the six months to 30 June 2019. The issue here is that it is harder to find seasonal workers and full-time workers, so Arena will incur an extra £250,000 of costs this year as a result of taking on more expensive agency workers.

A softer London events market subdued by ongoing economic uncertainty is not helping, either, and Mr Lawless expects a £600,000 sales shortfall (on a 60 per cent profit margin) for the full year which is clipping the bottom line further. Overall, the UK division posted flat first-half cash profit of £2.1m on 4 per cent higher revenue of £24.2m, but the impact of the aforementioned issues is primarily why house broker Cenkos Securities lowered its full-year cash profit estimate for the group as a whole from £15m to £13m (stated pre-IFRS 16 changes which knock an additional £600,000 off group net profits).

There are labour issues in the US, too, acerbated by President’s Trump’s immigration policy which has forced Arena to employ more expensive third-party temporary labour. Although 70 per cent of Arena’s annual income is recurring by nature, softer sales in the US mid-West region means that turnover there is $3m behind expectations for the full year. The plan is to reduce the US cost base by $2.5m to try to derisk 2020 revenue estimates.

Arena’s net bank debt excluding finance leases (£500,000) increased from £19.2m to £28.6m – well within a £40m bank facility with three years to expiry – but the working capital performance is set to improve in the second half when the company generates most of its revenue. Cenkos is forecasting closing year-end net debt of £22.8m and the cash profit covenant is 2.5 times year-end borrowings, so Arena is still comfortably trading within the covenant based on its downgraded pre-IFRS16 cash profit estimate of £13m (£17m on IFRS16 basis).

The problem for shareholders is that the aforementioned £2m downgrade in this year’s profit guidance falls straight down to the bottom line as this is an operationally geared business with a relatively fixed cost base. Add to that the £600,000 net profit impact from the adoption of IFRS16, and Cenkos have cut their 2019 pre-tax profit estimate from £6.5m to £3.5m. On this basis, expect full-year earnings per share (EPS) of 2.5p, rather than the 4p Cenkos had been forecasting when I covered the annual results in early April. The board halved the half-year dividend to 0.25p a share, and Cenkos is predicting the annual payout will be cut by a third to 1p a share. The house broker is also taking a more conservative view of trading prospects in 2020, reducing its EPS estimate from 5p to 3.9p.

In the circumstances, it’s not surprising that investors' confidence has been knocked, with Arena’s shares falling sharply to an all-time low, or a third of the level at which the company raised £20m of new equity for acquisitions last year. The share price fall prompted Mr Lawless to purchase 200,000 shares, at 21p, but I feel that investors are likely to remain very cautious for quite some time yet. Also, finance director Piers Wilson will be going on gardening leave next month without a job to go to. His role is being taken over by new recruit Steve Trowbridge whose experience includes stints with Evan Cycles and HSS Hire.

The bottom line is that with Arena’s acquisitive growth strategy on hold, one of the reasons I first advised buying the shares, the company facing up to operational issues at both the UK and US operations, and the dividend being cut, then the investment thesis behind my original buy call no longer holds. Sell.