Ten-pin bowling operating firm Ten Entertainment Group (LSE: TEG) arrived on the stock market in May 2017. I like to keep a close eye on recently-listed firms because the biggest growth phase can happen early on in the life of a new public company. Sometimes that effect occurs because an Initial Public Offering (IPO) leaves the firm well capitalised and therefore possessing the financial firepower to pursue its growth ambitions. On top of that, directors and management teams can be at their entrepreneurial best and hungry to prove themselves in the public arena by delivering strong growth and a rising share price.
I like what I’m seeing
However, it doesn’t always work out like that. Some firms list on the market only to crash and burn, taking the share price down with them. But I like what I’m seeing with Ten Entertainment. The firm has a record stretching back before its IPO of rising revenues, normalised earnings and operating cash flow. Meanwhile, dividend payments started in 2017 and City analysts forecast meaningful rises in the payment going forward. They also predict that earnings will rise by more than 20% in 2019 and by almost 15% in 2020.
Things seem to be going well for the company, but the valuation remains modest. At today’s share price close to 222p, the forward-looking price-to-earnings multiple runs at just over 10 for 2019 falling to around nine in 2020. The forecast dividend yield for 2019 is running close to 5.8% and those anticipated earnings should cover the payment around 1.7 times.
So why is the valuation this low when the growth predictions seem to encourage a higher valuation? I can see two possible reasons for that. Firstly, I reckon the investment community takes time to catch on to the growth stories of newly-listed companies. Secondly, there’s no doubt that Ten Entertainment’s operations will contain a lot of cyclicality, which means the firm may not deserve a higher valuation.
But despite my reservations about cyclicality, the company is growing because of its acquisition activity, and I find today’s full-year trading update to be encouraging. The operations are in the UK with the company running 43 “family entertainment centres.” Total sales increased by 7.5% during 2018 compared to the year before and 2.7% of that rise came from like-for-like advances, which suggests the offering is resonating with customers.
Steady growth
During the year, the firm acquired and refurbished four new sites and disposed of one under-performing site. There is a “strong” pipeline of acquisition opportunities and, looking ahead, the directors are aiming to add between two and four sites per year. Chairman Nick Basing explained in the report that like-for-like sales have grown for seven consecutive years “despite the headwinds of the extreme summer conditions.”
It seems to me that Ten Entertainment and other firms such as Hollywood Bowl Group have hit onto a popular and fast-growing niche in the leisure industry. Mr Basing describes it as an“experiential” segment and the company’s position in it gives him “confidence during the current economic and politically uncertain times.” Meanwhile, the outlook is positive, and I’m tempted to dip my toe in the water with a modest purchase of a few of the firm’s shares.