companies

Essenden

EPIC: ES.P
Mid-price: 35p
Spread: 30p – 40p
Total no. of shares: 21,424,740
Market cap: £7.5 million
12 month range: 32p – 55p
Website: http://www.essenden.com/
Sector: Leisure Entertainment & Hotels

Background

Essenden is the holding company for the tenpin bowling operations of Tenpin Limited and a portfolio of five investment properties held for sale for redevelopment. The principal activity of the group comprises the operation of 38 tenpin bowling centres that are largely situated in high visibility locations such as multi-leisure parks and town centre leisure complexes.

Essenden in its current form was founded on 5th March 2009 following a scheme of arrangement which saw it acquire 100% of the share capital of the former owner of the tenpin bowling assets, Georgica. Key to the group’s strategy is to offer value for money and affordable entertainment for families, adults and children alike in an accessible, safe and fun environment. It has spent over £3.3 million on industry leading IT systems over the past three years to support new channels of demand.

Financials

Following the launch of a turnaround strategy, named “Winning Way”, the half-year ended 27th June 2010 saw like-for-like sales down by only 2%, compared to an 11% fall in the first half of 2009. The improved sales trend was driven by a 2.5% rise in footfall, along with higher frequency of visits and an improved measure of customer loyalty. In addition, a focus on the company’s food offerings led to significant growth in sales from this side of the business. Coupled with lower administrative expenses, pre-tax profits rose by 20% to £1.2 million. And along with a lower tax charge earnings per share increased from 2.4p to 4.1p.

On the balance sheet, the firm held £2.2 million in cash at period end, up from £1.4 million twelve months previously. Current assets at the half-year end exceeded current liabilities by £1.5 million. Net debt at the period end was £23 million and net interest payments were covered 2.17 times by operating profits. The company held a retained deficit of £66.6 million at the period end.

The firm said that trading has proved to be challenging at the start of the second half, with the football World Cup and an extended period of extreme warm weather impacting trade. Some recovery has been seen since then however.

During the second half, the group anticipates further progress in attracting customers. Sing Dizzy, a karaoke concept, was introduced in Cambridge in June 2010 and a second site will be installed during the second half of the year. A new food concept, Beach Road Café Bar, has been developed and will be trialled in three sites during the second half of the year and the group will also relaunch Quasar, a combat simulation activity which operates in fifteen centres.

Moving towards 2011 the firm remains mindful of the turbulent nature of the economy and the increasing pressures on consumer’s disposable income. Encouragingly, as part of a strategic review an initial £1.5 million of operational cost savings having been identified, the benefit of which will accrue from the beginning of the second half. A second stage of the cost savings exercise will be implemented by the year end that will provide a further £2 million of planned benefits.

Management

Rory Macnamara, Non-executive chairman, qualified as a chartered accountant with Price Waterhouse and worked in merchant banking with Morgan Grenfell for 17 years. During his time at Morgan Grenfell he was a director in Corporate Finance, Head of Mergers and Acquisitions and Vice Chairman. In 1999 he joined Lehman Brothers, where he was a Managing Director in UK Investment Banking until 2001.

Nick Basing, Chief Executive, is a highly experienced industry leader who has 25 years of operational experience in the leisure sector. Most recently he was responsible for the operational turnaround and growth of Paramount Holdings, where he was chief executive for 6 years. Prior to Paramount he held a number of senior management positions with companies such as Rank, First Leisure, Unilever and Granada.

Richard Darwin, Finance Director, qualified as a chartered accountant with Coopers and Lybrand. He has held senior finance roles in a number of public and private companies including Hard Rock Café, Diageo and Paramount Holdings. He has significant operational finance and transactional experience obtained through working with a number of leading leisure and consumer brands.

Investment recommendation

At a mid-price of 35p Essenden is capitalised at £7.5 million. While trading has been hit by consumers holding back on discretionary spending in the past few years the recent interims are encouraging. There is evidence of a reduction in the rate of decline in like-for-like sales and we would expect consumers to step up spend on leisure activities once the economic recovery is in full-flow. What’s more the cost saving identified should also boost the bottom line in years to come.
While the company is heavily indebted, trading on a multiple of 8.5 times earnings posted in the first half alone, and a multiple of just 4.5 times operating cash flow, the shares are worthy of a speculative buy.