Don't Follow the Herd

A 6% price drop on Friday last caused me to revisit my valuation/investment decision on AAD. These are some of my findings which prompted me to buy more at the day's low (please check and DYOR before making your own investment decisions):

1. Based on Main Event's average centre revenue of US$7.7M and EBITDA margin of 25%, just the 15 new centres to be opened over the last half of this FY and the next FY will add US$28.5M in EBITDA. Even without the exchange rate difference this exceeds the annual EBITDA for the poorly performing Health Clubs division of just under AU$26M, based on extrapolating the latest quarter's result.

2. The next two biggest divisions are performing very well now. Theme Parks is benefiting from the low AU$ and the rapid increase in inbound tourism, particularly the Chinese, and had a 4.8% increase in EBITDA last quarter. Rumours of another theme park being planned for the Gold Coast is not bad news, as it will only increase the tourism into this area. Also, I consider AAD's assets to be more dynamic and interesting to families than a tired Disneyland format (does Disney have the same impact on younger families as it did 50 years ago?). For those who worry about the increased competition in 4-5 years time, think about how specialist furniture shops seem to congregate together in the major cities, as it brings customers to that area to visit most of the shops. The risk to AAD is anyway less in 4-5 years time as Main Event will dominate AAD's assets and earnings by then.

3. Bowling is also recovering well, as AAD copies across some of its learnings from the Main Event experience. Its EBITDA was up a sizable 12.2% last quarter.

4. Marinas will recover after developments are finished, but I expect it will remain a low growth but profitable division. This does not matter one bit, as it will be tiny in the scheme of things.

5. The poorly performing Health Clubs is already only around 17% of total EBITDA, and is becoming less important as time goes on. Even if its EBITDA was to fall another 10%, this would only result in less than 2% impact on total EBITDA. That said, I believe even this division will turn around in FY17 and show growth once again.

My conclusion is to ignore short-term volatility in the share price, and look forward to significant growth in profits and distributions the medium term.