Can Hollywood bowl return to pre-pandemic levels?HOLLYWOOD BOWL Tip: STRONG BUY Current price: 239.00 Target price: 302.72
Bullish points: - Net cash
- Staycation likely to remain a theme
- Return from lockdown likely to cause spending surge
- Consistent profit growth pre – pandemic
- Consistent dividend growth pre – pandemic
- Record start to 2020
- Non – reliant on acquisitions to grow
- Opening new centres
- Trialling new products
- Resilient during the pandemic
- Well run business
- Spend per head increasing prior to Covid
- Relatively niche area
- Falling debt levels prior to Covid
- Strong brand name
- Has a competitive edge
Bearish points: - Pain of Coronavirus continues
- Valuation at a premium to rival
- Potential for more bowling alleys to be set up after people see the earnings and the growth
Prior to the pandemic English bowling alley operator Hollywood bowl was thriving, earnings were consistently rising along with a dividend and revenues, as a result the share price had almost doubled from their IPO in 2016 to early 2020, however, not long after that, the pandemic struck, causing the share price to crash from north of 300p to a share price that only consisted in of two digits (non – decimal). The shares have subsequently bounced back, aided by the discovery and roll out of the Coronavirus vaccine and now trade at 236.00 p per share.
As a result of Coronavirus, the group was forced to slash at its dividend after the group was forced to shut its venues, causing revenues to take a massive hit. However, Hollywood bowl, has proved resilient and still managed to post a 1.4 million pound profit in the 2020 financial year, despite having been closed for 5 months and having trading impacted in two others. The group was equally resilient in the first half of the financial 2021 year with a loss of only 11,633,000 despite being fully closed for 75% of that period and trading severely impacted in the rest. What’s even more impressive is that the loss for the half year of 11,633,000 is less than 3% of Hollywood bowl’s market cap of around 400 million compared to billions of pounds of losses by other hospitality companies such as Cineworld, such low losses was aided by a reduction in rents.
Whilst, even at the end of the interim results Hollywood bowl was still closed the centres have since reopened (on the 17th of May – freedom day) and there are reasons to be optimistic about the trading despite the pandemic. The first reason, is that when the centres re – opened briefly in October, trading exceeded expectations with revenues at 66% of the previous year despite many restrictions such as the 10pm curfew, maximum groups of six, a maximum number of people allowed in the centre and more. What’s more is that spend per head only decreased from £10.29 to £10.16 from the first half of 2020 to October 2020 despite there being many Covid restrictions, implying that consumer habits have not changed at all. Secondly, the group has taken steps to mitigate the effect of Covid such as adding lane dividers meaning that now all the lanes can be used. Thirdly, the group has received very strong customer pre-bookings prior to May the 17th implying that there will be strong trading. Fourthly, since customers have been deprived of these forms of entertainment and have not been able to spend a lot of money it is likely that the savings made will be released into the economy and Hollywood bowl could benefit. Finally, since flights abroad still look like a distant possibility for most places and people given all the lists, quarantines, bemusement and uncertainty surrounding the trips staycation is likely to remain a theme meaning that people will look for forms of entertainment in the UK and Hollywood bowl could benefit. For these reasons there are reasons to be optimistic with how Hollywood bowl will perform whilst re-opened.
Despite numerous lockdowns and impacted trading the group has a very strong balance sheet. From the 2021 interim results the group has 41,679,000 current assets compared to 27,705,000 current liabilities, meaning that it has a current ratio of 1.5 implying that it has a robust working capital position. The group also has net cash of 8,160,000 pounds aided by a 30 million placing with 29.2 million net proceeds after 800,000 worth of costs, showing that the group is not under financial strain and can continue its growth. Hollywood bowl also managed to change covenants with its lender Lloyds bank implying that it can continue the growth story and has reserves for future lockdowns. The group has a highly cash generative business model so once it is allowed to open any debt that could have built up from the expansion plans and lockdowns can be paid off.
There is clear scope for growth ahead, and even more impressively, the group has the ability to grow organically without the need to open new centres. The group has instead improved existing centres by making them more cost efficient and also by enhancing consumer experience. For example, it is revamping the technology around the business, such as improving the IT, creating new scoring systems and adopting pins on strings systems. The group has also refurbished sites or is planning to sometimes even getting rent concessions in the process for example a £0.8 million one in Liverpool. The group has also begun to roll out its new mini golf course Puttstars, which so far has been very successful in the few places it has been implemented, very good reviews. Hollywood bowl also caters at the centres with bar and diner lay outs attracting more and more people to eat at the centre, product changes also helped increase bar and diner spend per game by 3.1% from 2018 to 2019. From this it is unsurprising to see that spend per game was £8.63 in 2016 rising to £8.70 in 2017 rising again to £9.22 in 2018 and even rising to £9.64 in 2019. This trend is unlikely to stop given the consistency (spend per game rose to £10.29 in the first half of 2020 and was resilient in the pandemic.) It is also worth noting that many of these changes / additions were suggestions by employees showing how the group has a growth mindset and that it is a well run business. Along with improving existing centres, the group has been expanding and is planning to have 14-18 new centres by 2024 a target which has been doubled, a material number in relation to the 61 already established.
Predicting when the effects of the pandemic will wear off is very tricky, but I believe that especially with the safety procedures in place Hollywood bowl will be able to operate more easily than other hospitality companies. My conservative earnings for the 2023 financial year are 25 million, compared to 22,285,000 in 2019 I think that my predictions are conservative as it has consistently increased earnings both organically and through acquisitions and the worst effects of the pandemic should have hopefully worn off by then. I believe that after the acquisitions and refurbishments, but counter balanced by the strong cash flow the group will be in net debt / net cash 0, note: the current net cash position is 8,160,000 million pounds.
So come the 2023 full year financial results, according to my estimates (25 million net income and the current market cap is £407.8 million) Hollywood bowl will have a p/e of 407.8 / 25 = 16.312. For all these reasons above I believe that the valuation is very undemanding and there is huge scope for earnings growth and p/e expansion. To demonstrate how well Hollywood bowl is growing let’s look at how operating profit did over the years.
2015: £13.0 million 2016: £14.4 million 2017: £22.2 million 2018: £24.9 million 2019: £28.4 million. From this we can see that earnings have been consistently growing and the group has increased operating profit by 118% over 4 years or almost 22% every year. It is also worth noting that earnings could have been rising faster had the group not been paying out an increasing dividend and paying down debt. The money used for the dividends and the debt could have been used for expansion and thus increasing earnings further. Let’s see how the dividends did over time, total dividends paid (per share):
2015: 0p 2016: 0.19p 2017: 9.08p 2018: 10.59p. 2019: 11.93
Let’s also see the how the debt levels of the group were doing pre - pandemic:
2015: £24.6 million 2016: £20.8 million 2017: £8.1 million 2018: £2.5 million 2019: £2.1 million.
Considering the fact that the group managed to increase earnings, dividend and reduce debt consecutively for the 4 years after the IPO up until 2019 (pre – Covid.) Should the group pay out let alone increase dividends and reduce debt levels I believe that earnings can I create by somewhere around 30% from 2023 going forward. Please note I used operating profit growth to avoid one off costs such as the ones required to have the IPO, would not distort earnings.
I believe that a conservative p/e for Hollywood bowl is 2023 is 25, considerably higher than the 16.312 it is currently on. This would give the group a market cap of £625 million (366.29p) offering a conservative 53% upside from here. I believe that a p/e of 25 is conservative given that the group could have eps growth of 30% giving it a PEG ratio of 0.83333333333333333 (recurring) which looks cheap given that it is under 1. Throw in the fact that the group will be debt free and a strong cash converter and it will not be surprising to see Hollywood commanding a p/e in the 30’s.
Some could argue that given the good returns Hollywood is making it could be possible that more companies will be attracted to the sector and could start to create completion and eat into the returns. However, given the strong brand name (Hollywood bowl has taken special attention to rebranding bought bowling alleys such as Bowlplex and AMF) and the good quality centres of Hollywood (following refurbishments, enhancements and new products) it looks like Hollywood bowl will have a competitive edge.
It is also good to know that the directors have plenty of skin in the game with the CEO owning over £7 million of shares and in total 3 directors owning over £2 million shares, and even without the incentive plans they will be incentivised to deliver.
So come 2023 and I believe that the group should have a market cap of £625 million (366.29p), (so I believe that Hollywood bowl can return to pre-pandemic levels) given the date of the FY2023 results is around 2 years and Hollywood bowl is a medium risk investment, the market will probably be wanting a 10% return every year, and so 21% over 2 years. 625 / 1.21 = 516.53 (million) (302.72p) indicating around the group is currently 27% undervalued. However, I have been conservative on my earnings and valuations estimate so my target is could be very conservative, given the growth on offer here.
So a company with robust cash generation, strong balance sheet and plenty of potential for growth is being rated on a forward 23 earnings of just over 16, not to mention the fact that it has a strong brand name, a competitive edge and that it is a well run business. From this I believe that the group is very undervalued. STRONG BUY Current price: 239.00 Target price: 302.72
