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BUY: Hollywood Bowl (BOWL)
Demand remains to be excessive on the leisure firm — however margins are below stress, writes Jemma Slingo.
Ten-pin bowling was a giant hit when pandemic restrictions have been lifted. With their low-cost, family-friendly choices, the likes of Hollywood Bowl and Ten Leisure loved a surge in recognition in 2021 and 2022, which translated into bumper income. The query for buyers was whether or not this progress was sustainable, or whether or not demand would wane because the reminiscence of lockdown retreated.
Thus far, so good: income at Hollywood Bowl elevated by 10 per cent within the first half of 2023 to £110mn. It’s necessary to notice that hospitality companies paid a decrease price of VAT between July 2020 and March 2022, as a part of the federal government’s Covid help package deal. Which means that Hollywood Bowl’s 2022 figures have been unusually excessive. When the VAT profit is stripped out, year-on-year progress for 2023 is much more spectacular at 21 per cent.
Natural gross sales progress was slower at 3.5 per cent. Towards powerful comparators, nevertheless, the group nonetheless managed to extend sport volumes by 0.6 per cent and increase spend-per-game by 2.8 per cent. Administration has been reluctant to lift costs an excessive amount of, although, stressing that it nonetheless gives the “greatest worth for cash product of all of the branded UK bowling operators”, with a household of 4 in a position to bowl at peak occasions for lower than £25.
Administration’s fixation on worth for cash means the group is on the mercy of price pressures. Administrative bills jumped by 23 per cent 12 months on 12 months, pushed by wages and property. The state of affairs was made worse by the rise of lower-margin amusements, that are rising at a better price than bowling. As such, the group’s statutory revenue earlier than tax shrank by 20 per cent to £26.7mn.
As soon as once more, nevertheless, the state of affairs is brighter when the affect of the VAT discount is eliminated. In the meantime, the group is making good headway with its enlargement technique: 2023 will probably be a “file 12 months of funding within the property” and it’s on observe to open at the very least three new venues.
Traders are nonetheless cautious of leisure shares, and Hollywood Bowl is buying and selling on a ahead value/earnings ratio of simply 13, in contrast with a five-year common of 18. It has been cheaper, however we imagine this nonetheless represents a horny entry level.
BUY: Pennon (PNN)
South West Water proprietor Pennon has seen its income fall considerably within the 12 months ending March 31, as energy and different working prices climbed concurrently a drought hit Dorset and Cornwall. Pennon additionally runs Bristol Water, which got here below the previous’s umbrella formally in March.
Its underlying revenue earlier than tax fell 88 per cent to £17mn, with its internet curiosity cost additionally taking a bit out of earnings.
Like others within the water sector, Pennon has additionally flagged a lot larger stress to curb its dumping of sewage and wastewater. Capital spending was largely targeted on “water sources investments”, nevertheless, in response to very low storage ranges after the dry summer season. General spending climbed by half to £358mn, and the corporate goals to spend £750mn over the following two years.
On prime of the stress to cease sewage and wastewater releases, the main target has additionally elevated on leakage within the UK’s water networks. Ofwat has additionally particularly opened an investigation into Pennon’s reporting of “operational efficiency knowledge referring to leakage and per capita consumption” for the 2022 monetary 12 months.
Pennon has elevated its dividend 11 per cent according to its inflation-plus-2 per cent coverage. Its return on regulated fairness, the measure by which utilities measure their use of capital, was 10.5 per cent, up from 8.9 per cent. United Utilities, which runs water monopolies within the North West, managed a leap of three.3 proportion factors in the identical interval.
The enterprise mannequin of the personal utilities has come below heavy scrutiny, given the mixture of heavy spending necessities to get infrastructure as much as scratch, and the excessive dividends being paid. One thing has to provide.
HOLD: Greencore (GNC)
Constructive indicators with gross sales, with quantity progress posted in a difficult meals market, writes Christopher Akers.
The market favored what it noticed in comfort meals producer Greencore’s outcomes, with shares marked up by 7 per cent in early buying and selling on outcomes day. A chunky income uplift was pushed by value will increase as the corporate sought to get well larger prices, in what stays an elevated and unstable meals value surroundings. Final week, the Workplace for Nationwide Statistics confirmed that annual UK meals and non-alcoholic drinks inflation was 19.1 per cent in April, down solely barely from 19.2 per cent in March.
Meals-to-go and different comfort gross sales rose by 15.6 per cent and 28.5 per cent respectively within the half on the again of pricing motion. There was constructive information on volumes, too, with manufactured volumes up by 5 per cent. Packaged sandwiches stay in demand regardless of adjustments to working patterns.
However top-line progress couldn’t cease larger prices tipping Greencore into the purple. Finance prices rose by £4mn as larger rates of interest elevated the price of debt, and working revenue halved to £3.6mn on the again of what administration known as “vital” price inflation, though the board is bullish about price restoration within the second half. Adjusted working margin fell by 90 foundation factors to 1.3 per cent.
Elsewhere, the leverage ratio fell from 2.1 to 1.9 occasions and an extra £10mn share buyback programme was introduced.
Home dealer Shore Capital “assume a robust bounce again in profitability, with a willpower that, hopefully, yields higher occasions thereafter”. That continues to be to be seen, however Greencore ought to profit as commodity costs ease. The shares commerce at a notable low cost to the five-year common, at eight occasions ahead earnings in contrast with a historic score of 12 occasions in line with the FactSet-compiled consensus.
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