What you will Learn
-The Ten-pin Bowling Industry and the company’s growth strategy.
-The cost of maintaining and refurbishing each centre.
-Share Price forecast.
Hollywood Bowling is a ten-pin bowling company.
The company was formed in 2010 from the merger of three separate businesses: Hollywood Bowl, AMF Bowling and Bowlplex.
Today, it has 57 centres in operations.
According to “Unconfirmed” (no link and from the Hollywood Bowl website) research done by Pragma. It says the UK leisure market is worth £80.3bn in 2015. Within that figure, ten-pin bowling controls 0.3% or £240m.
However, the ten-pin bowling is growing at 6% per annum vs. the wider industry growth rate of 3%.
Leisure companies like Ten-pin bowling, cinemas and nightclubs don’t solely rely on bowling, movies and attendance fees as their main source of income. There are food and drinks and other sources of income.
For Hollywood Bowls, 48% of revenue comes from bowling, 28% from food and drinks and the rest from amusement machines.
Management is seeking to open two new centres per year. If not, they will acquire existing bowling sites. This year they open 3 new centres.
Hollywood Bowling’s Financials
Sales grew 55% from 2013 to 2017.
In 2015, net interest paid was £8.3m on total borrowing of £92.3m and consumes 64% of its operating profit.
This year, net interest costs fell to £1.1m. Thanks to lower borrowing costs and absent of paying loan note interest of 7%, which was part of the deal when listing in the market.
And thanks to the IPO, the level of debt got reduced to £29.4m.
Brokers’ were forecasting 10.6 pence per share and actual was 12.17 pence, hence it beats forecast. Also, it beats 2018’s EPS of 11.9 pence.
Unless something adverse happens, next year investors could see EPS of 14 pence.
There is a £75m worth of goodwill on their books.
Not a worry, if profits are stable.
Cash flow generation is strong at £28m and generating free cash flow of £15m.
Hollywood Bowling: Debt and Dividend
Debt remains the same as last year, and net debt fell to £8.1m, down from £20.8m.
Hollywood has a bank facility of £30m and on 20 September 2021. Also, it has undrawn £5m revolving credit facility and undrawn £5m capex facility.
One of the many surprises are total dividends declared rose to 9.08 pence per share, equivalent to £13m. The company paid out £3m but is waiting on shareholders’ approval for £10.9m of dividends split between final and special.
It looks like there has been a swap from paying interest costs to equity dividend.
By the way, if it gets paid then net debt rise to £19m.
Hollywood Bowls Leasing and Maintenance
The company paid £13.7m in operating lease on 57 centres. The maintenance cost per centre is £100,000 per annum.
Investors need to think about the refurbishment costs per centre for every 6 to 8 years.
Last year, refurbishment cost £2.86m and the number of centres was 54, so divide that by 7 years = 7.71 centres get refurbished per year. That number will rise as the company increase centres.
Then, £2.86m/7.71 centres = £371,000 per centre.
For each centre, Hollywood is spending £145,000 to maintain and refurbish, but each centre generates £2m in sales per annum.
Also, profit per centre is running at £140,000 per annum.
Shares in Hollywood rose to £2.03 per share, up 5% with a market valuation of £300m.
With EPS of 12.2 pence, then PER falls to 17 times.
Brokers’ have underestimated forecast.
And for 2019, EPS growth will slow to 8.9%.
With slower EPS growth for the future, the market won’t give Hollywood Bowling a higher PER of more than 14 to 15 times meaning the share price appreciation would be no more than 10% growth.
Final Thoughts: Hollywood Bowling
Taking everything into consideration, I believe the company will continue growing steady for the next two years. I feel the cinema’s industry is oversaturated.
Add in Hollywood latest “sex scandals”, then some would turn to alternatives for entertainment. This would definitely benefit the bowling sector.
However, don’t expect the shares to race away and double in six months. At best, I expect a 50% gain by 2020 or £3 per share. No special effect or excitement, but a decent company to invest in for a dividend.
If you are looking for income, then today’s dividend announcement means it is yielding 6% to current share price (including the special dividend).
Although management is optimistic, be very aware of fresh signs of a recession or slowdown in economic growth. A secondary indicator is to watch for rising unemployment rate.
Any small percentage decline in consumer spending would hit businesses like bowling hard. Same would be said about eating out, nightclubs and going to the cinemas.
Hollywood Bowling inherits MEDIUM-RISK features in your portfolio.
CALL TO ACTION
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.